Everyone wins when estate planning attorneys, financial advisors and accounting professionals work together on a comprehensive estate plan. Each of these professionals can provide their insights when helping you make decisions in their area. Guiding you to the best possible kind of trust options tends to happen when everyone is on the same page, says Jerry Taylor of Jerry Taylor Law in Fairhope, Alabama.
What is a trust and what does it accomplish? They are not just for the wealthy. Many families use them to serve different goals, from controlling distributions of assets over generations to protecting family wealth from estate and inheritance taxes.
There are two basic kinds. There are also many specialized trusts in each of the two categories: the revocable and the irrevocable. The first can be revoked or changed by the trust’s creator, known as the “grantor.” The second is difficult and in some instances and impossible to change, without the complete consent of the trust’s beneficiaries.
There are pros and cons for each type of trust.
Let’s start with revocable, which is also referred to as a living trust. The grantor can make changes at any time, from removing assets or beneficiaries to shutting it down entirely. When the grantor dies, it becomes irrevocable. Revocable are often used to pass assets to adult children, with a trustee named to manage the assets until the documents direct the trustee to distribute assets. Some people use a revocable trust to prevent their children from accessing wealth too early in their lives, or to protect assets from spendthrift children with creditor problems.
Irrevocable trusts are just as they sound: they can’t be amended once established. The terms cannot be changed, and the grantor gives up any control or legal right to the assets, which are owned by the trust.
Giving up control comes with the benefit that assets placed in the instrument are no longer part of the grantor’s estate and are not subject to estate taxes. Creditors, including nursing homes and Medicaid, are also prevented from accessing assets in an irrevocable trust.
Irrevocable trusts were once used by people in high-risk professions to protect their assets from lawsuits. They are used to divest assets from estates, so people can become eligible for Medicaid or veteran benefits.
The revocable trust protects the grantor’s wishes, if the grantor becomes incapacitated. It also avoids probate, since the trust becomes irrevocable upon death and assets are outside of the probated estate. The revocable trust may include qualified assets, like IRAs, 401(k)s and 403(b)s.
However, there are drawbacks. The revocable trust does not provide tax benefits or creditor protection while the grantor is living.
Your estate planning attorney will know which is best for your situation, and working with your financial advisor and accountant, will be able to create the plan that minimizes taxes and maximizes wealth transfers for your heirs. For more information contact Jerry Taylor Law.