All trusts are legal arrangements that allow for an estate’s assets to be passed from the creator of the trust to its beneficiaries relatively quickly and easily, often protecting your beneficiaries’ assets from certain kinds of claims or taxations. Trusts can provide a variety of benefits for your family after you are gone — and can even provide you peace of mind and financial security during your lifetime.
How Is a Will Different from a Trust?
Unless you spend a lot of time thinking about estate planning, you may not be sure how a trust differs from a last will and testament. A will is a document that expresses your last wishes, from how your assets will be distributed to whom you want as guardian of your children. A will is not active until your death, and it will need to go through the probate process to ensure it is valid and legally binding. Wills are also public record.
At its most basic level, a trust is an estate planning arrangement that is not subject to probate (with the exception of a testamentary trust, which is a trust created by a will and therefore subject to probate).
All trusts will have four basic elements:
- Grantor: The creator of the trust
- Corpus: The assets held in the trust
- Trustee: The manager of the assets
- Beneficiary: The person who receives the assets
Trusts can be created to distribute funds and assets while the grantor is still alive, and a grantor can even designate themselves as the trustee. While trusts won’t be probated, they can be challenged by heirs if they are willing to take the legal steps to do so.
What Is a Living Trust?
Unlike a testamentary trust, a living trust is a kind of trust that is active from the moment it’s created. If corpus wasn’t enough of a refresher of your high school Latin, you’ll be interested to know that living trusts are also called inter vivos trusts. A living trust is active while you are alive, and it continues after your death.
A living trust comes in two different forms:
- Revocable: These trusts can be changed at virtually any time by the grantor.
- Irrevocable: These trusts cannot be changed by the grantor without the approval of each beneficiary, if at all.
For taxation purposes, the Commonwealth of Massachusetts will also categorize your trust as either a resident or a nonresident trust.
What Is the Main Purpose of a Living Trust?
Most people choose to create living trusts to protect their loved ones from having to undergo the probate process. Even under the Uniform Probate Code, probate can be a beastly process. And if there is any risk of conflict or discontent among family members, the probate process can be even more difficult.
Most families aren’t going to live through a Knives Out-esque saga, but even conflict-free probate of a rock-solid will requires a number of steps. If settling your affairs isn’t the kind of mystery your loved one will enjoy solving, then a living trust might be a generous solution.
What Are the Advantages of a Living Trust?
Aside from avoiding probate, which some people may find useful, a living trust can provide additional benefits. Here are some of the reasons a trust might work in your favor.
- Taxes. A revocable living trust will not help you avoid taxes during your lifetime; the only reason you can make changes on your own to the trust is because you still control the assets. However, a trust allows you to manage the disbursement of assets to your beneficiaries, which can reduce the amount of estate taxes they pay, especially if you are married. A revocable living trust can allow you to defer estate taxes after your death, and an estate planning attorney can help you determine the best course of action for when and how to pay those taxes, depending on the size of your estate. An irrevocable trust can offer some reduction in federal taxes since the tax is paid on what income is distributed from the trust and not the amount of money in the trust itself.
- Money management. Sometimes, you might be concerned about what will happen to your heirs or beneficiaries after your estate transfers to their pockets. If you have a beneficiary you believe would benefit from extra support — and perhaps a little bit of exercised caution — a trust is one way to provide for them financially in a way that suits your wishes. This can be especially beneficial if you have young children or adult children with special needs.
- Creditors’ claims. In Massachusetts, irrevocable trusts can offer some protection to your beneficiaries from settling your debts that a will might not, especially if the trust has multiple grantors. The state does allow creditors to make claims on money in both revocable and irrevocable trusts while you are living. With an irrevocable trust, the amount itself will depend on how the trust is arranged, and a trust attorney can provide information specific to your circumstances to help you decide if this arrangement might benefit your family.
- Medicaid. An irrevocable trust can allow you, your spouse or even your beneficiaries to become Medicaid eligible. Because an irrevocable trust cannot be changed, the trust is now the owner of the assets.
- Autonomy. Estate planning is not just about what happens when you die. Planning ahead for the worst-case scenarios that might impact your family in order to avoid the worst possible consequences is a crucial part of taking steps to protect your assets now. If you want to consider how you might avoid someone seeking control of your finances through conservatorship should you become ill or disabled or in your elder years, you might be a good candidate for establishing a trust.
Until you consult with an estate planning attorney for a deep dive into personalized estate planning, there’s no telling which advantages of living trusts will truly benefit you — and to what degree. If you fall within the following, however, you are likely to find some advantage to moving beyond a simple will.
- Your estate is worth more than $100,000.
- You have substantial real estate assets.
- You want to manage asset distribution.
- You want an extra layer of asset protection.
Are There Disadvantages to a Living Trust?
In most cases, there are no terrible consequences to having created a trust, especially a revocable trust. However, the question really becomes whether living trusts are your best option when compared to other forms of estate planning arrangements. Here are some of the pitfalls of living trusts compared to other options.
- Taxes. A living trust might not provide the kind of tax shelter you are hoping for, especially if it’s a revocable trust. This is not necessarily a disadvantage of a living trust, but because living trusts is such a broad category — revocable or irrevocable, simple, complex, or grantor — you will need to work with an experienced estate lawyer to set up your trust to ensure that you are getting the full tax advantages for you and your family’s needs.
- Record-keeping. In some cases, having a trust can make filing taxes or other fiscal matters more complicated. If you’re in the nearly three-quarters of Americans who don’t file taxes solo — 36.8% with a professional tax filer and 28.5% with an accountant — this likely won’t be an issue for you. Your estate planning attorney can continue to advise you after the trust is created, so it’s not a deal-breaker, but the added steps are worth considering before diving in.
- Commitment. An irrevocable trust offers greater advantages when it comes to taxes and protecting assets, but it also means you will want to be very certain you won’t want or need access to the assets you use to establish the trust. People who are relatively sure might consider making an irrevocable trust part of their estate planning for some of their assets, especially if they received a large inheritance themselves. Your estate planning attorney can advise you about whether you should consider other options.
How Can a Trust Attorney Help Plan My Estate?
Trusts are extremely versatile, offering a wide range of benefits for all kinds of circumstances and financial situations. But not all estates benefit in the same way from the same kinds of trusts.
An experienced trust attorney will help you understand the different kinds of estate planning options and work with you to draft a plan that will benefit you today and your beneficiaries in the future, maximizing the benefits of whichever trust structure you choose. They can even act as an adviser to your trustee, if needed, or provide additional support.
Andover estate planning attorneys like The Law Offices of Kimberly Butler Rainen know from personal experience how important it is to have someone you can rely on to help you make some of the most important decisions of your lifetime, even long after the paperwork is filed. To start the conversation about planning your estate, contact our office today.