You may have come across various online articles explaining the benefits of having a trust—such as tackling estate tax implications, protecting your assets, and avoiding probate. However, many of these articles don’t delve into which trust option might be the best fit for you and your family. This blog aims to clarify the different trust options available, giving you the information you need to make an informed decision. Please note that this blog does not aim to comprehensively cover all types of trusts and their purposes, but rather focuses on the more common types and their respective functions.
Trust Options Explained
There are numerous types of trusts available, but they generally fall into two main categories: testamentary trusts and inter vivos trusts (often referred to as “lifetime trusts”).
Testamentary Trusts
A testamentary trust’s terms are specified within a Last Will and Testament but is established during the probate process and administered thereafter. This type of trust is particularly common for:
- Attempting to protect assets if a surviving spouse is residing in a nursing home at the time of the deceased’s death.
- Preserving funds for minor children or beneficiaries who may inherit.
- Preserving funds for disabled beneficiaries while allowing them to remain eligible for any public benefits they currently receive.
- Providing for a surviving spouse while ensuring the remaining assets pass to your children from a prior relationship.
With a testamentary trust, you have control over how and when your beneficiaries receive their inheritance. For instance, you can specify the frequency and number of distributions to your beneficiaries. This level of control can help ensure that the funds are used sensibly and responsibly.
Inter Vivos Trusts (also referred to as “Lifetime” Trusts)
An inter vivos trust is created during a person’s lifetime. These trusts can be further divided into two categories: revocable trusts and irrevocable trusts.
Revocable Trusts
A revocable trust, as the name implies, allows the creator to retain full access to the trust assets during his or her lifetime and provides the ability to revoke the trust at any time. A revocable trust is designed primarily to avoid probate, which can be a lengthy and complicated process in unique or complex situations. To achieve this, it is essential to transfer all assets that would typically be subject to probate into the name of the trust. When established correctly, a revocable trust can effectively bypass probate altogether, as the assets are distributed according to the terms of the trust rather than through a will.
Irrevocable Trusts
An irrevocable trust, in contrast, operates under much stricter terms. Once assets are transferred into an irrevocable trust, the creator relinquishes significant control and access to those assets, as they are managed by a trustee—typically someone other than the creator. One of the primary purposes of an irrevocable trust is to protect assets from potential Medicaid exposure and long-term care costs. Unlike revocable trusts, the creator does not usually transfer all of their assets into an irrevocable trust; only those strategically selected to minimize exposure to long-term care expenses are placed in the trust.
Another key benefit of an irrevocable trust is that all of the assets transferred into the trust are protected from probate. In contrast, assets held outside the trust (i.e., still held in the individual’s name) will be distributed according to the individual’s will, transferred to a joint owner, or passed on through beneficiary designation.
Making the Right Decision
Deciding whether to establish a trust—whether it’s a testamentary or an inter vivos trust—is a significant choice that requires thorough discussion and exploration of all options. A trust is not suitable for everyone, and it’s vital to understand your needs and circumstances.
The Estate Planning Team at Evans Fox is ready to help you explore your estate planning needs and find the best solutions for you and your family. Let’s work together to create a plan that provides peace of mind and protects your legacy.
Alex Anselment is an attorney at Evans Fox LLP focusing his practice estate planning, long-term care planning and estate administration. Alex can be reached at AAnselment@EvansFox.com.
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The content has been prepared for informational purposes only; it should not be construed as legal advice, does not create or constitute an attorney-client relationship, and readers should not act upon it without seeking professional counsel.