Many people utilize trusts in their estate plans because it helps them control the distribution of their assets to their beneficiaries. People also use a trust to avoid probate (the legal procedure of dispersing property after the owner dies).
If you do not think you will be able to handle your property alone in the future, trusts are an excellent option. Trust comes to an end sooner or later; the goal of including it in financial planning is to establish some level of predictability and stability.
What is a Trust?
A trust is a sort of property arrangement in which the property’s original owner, known as the ‘grantor,’ places the property in trust and appoints someone to look after it, identified as the ‘trustee,’ on behalf of another person, identified as the ‘beneficiary.’
The beneficiary receives the property in the end but under the terms of the trust in a written agreement. The written agreement (trust instrument) spells out the criteria and guidelines on property utilization.
Ending a Trust
The easiest way for a trust to end is under proper conditions meaning that the trust has been exhausted and the trust assets transferred to the beneficiary. If the trust property was cash or stocks, the trust ends if the beneficiary receives the entire amount, plus interest.
A trust can also end due to the instructions in the trust instrument. A grantor can set an ‘end date’ or a term; the trust will end after meeting the date/term. For example, the grantor can provide that a child receives money in a trust until the child clocks 18 or until the child graduates from college.
When a Trust Ends, What Happens Next?
If there is any remaining property in the trust, the trustee will negotiate with the beneficiary on distribution means. Some grantors wisely put distribution instructions in the trust instrument. But in a situation where there are no instructions, the trustee and beneficiaries must decide how to divide the assets fairly.
While lawyers are not necessary for this process, it is good to have them around. A lawyer can help in even more vital circumstances where possible beneficiaries are at odds with one another, which might involve litigation to resolve the issue.
Revocable Versus Irrevocable Trust: Benefits and limitations
Revocable trusts are popularly referred to as living trusts. You can change the beneficiaries and assets in these trusts as long as you are alive and capable. You can also appoint yourself as trustee and a co-trustee or successor trustee. If you are diagnosed with a severe illness, you may get your affairs in order before you cannot handle the trust on your behalf.
In contrast, an irrevocable trust is permanent after you place assets and name a beneficiary. However, one benefit of irrevocable trusts is that they may help you save money on estate taxes.
Revocable Trust Benefits
A revocable trust can be an efficient estate planning strategy for many reasons. The fact that the grantor can amend the trust conditions and dissolve the trust document at any time appeals to many people.
After naming assets in the trustee’s name, a revocable trust becomes effective immediately after signing and paying for the legal paperwork. Unlike a will, whose effect kicks in after the owner dies, a trust can handle your assets even when you become disabled.
Many people utilize revocable trusts to escape probate, a time-consuming and expensive procedure. By avoiding probate, the specifics in the trust instrument can remain secret rather than becoming public records and accessible to anybody.
Limitations of Revocable Trust
Since modifying the trust at any time is possible in a revocable trust, the grantor retains ownership of the trust assets. As a result, there are no tax advantages to establishing a revocable trust.
Furthermore, creditors can file claims against a revocable trust to retrieve any debts incurred by the grantor. The reason is that the assets still belong to the grantor or part of their estate.
Benefits of Irrevocable Trusts
Irrevocable trusts, like revocable trusts, prevent probate and protect the privacy of the beneficiaries. Irrevocable trusts can also protect assets from creditors and taxes because the grantor or part of their estate no longer controls the trust assets.
Irrevocable trusts also protect against creditors because the assets put into them no longer belong to the grantor or part of their estate. People in occupations where litigation is widespread, such as real estate developers, physicians, and lawyers, may find it helpful.
Applicants for government programs, such as Supplemental Security Income disability benefits or Medicaid long-term care coverage, must have restricted income and assets. An irrevocable trust can move assets away from an individual so that they do not exceed the coverage restrictions and at the same time qualify the coverage.
Limitations of Irrevocable Trust
An irrevocable trust requires the grantor to relinquish control and ownership of their assets to the trustee’s will. The grantor designates a trust protector to oversee the trust’s management.
However, many things might alter as life progresses. You might name a child or a close friend as a beneficiary of your irrevocable trust, only to have a falling out with them later. They remain a permanent beneficiary of your assets which is fortunate for them but disastrous for you.
Another disadvantage is that many irrevocable trusts employ complex procedures that are difficult to comprehend, set up, and manage. By removing the trust assets from one’s inheritance, irrevocable trusts require their tax identification numbers and the filing of separate tax reports. Given the complexities of these irrevocable trusts, trust and estate attorney services are likely to be required, which can be expensive.
Conclusion
The benefit of having trust is that it avoids probate, which is time-consuming and expensive, and makes your assets and obligations public knowledge, which most individuals do not want. The trust will allow you to dispose of your estate plan without revealing your assets and liabilities to third parties you may not want to know before or after death.
