Exploring Trust Funds: An Explanation of Their Functioning Mechanism
Trusts are estate planning tools used to manage and distribute assets on behalf of beneficiaries. They come in two main varieties: revocable and irrevocable, each serving different purposes.
Control and Flexibility
A revocable trust allows the grantor to retain full control over the assets and make changes or revoke the trust anytime during their lifetime. On the other hand, an irrevocable trust requires the grantor to relinquish control once established; the terms generally cannot be changed or revoked without beneficiary approval or court intervention, making it much less flexible.
Probate Avoidance and Privacy
Both trusts avoid the need for probate after the grantor's death, allowing assets to pass to beneficiaries without court involvement, speeding up the process and maintaining privacy. However, revocable trusts primarily focus on avoiding probate and managing incapacity, while irrevocable trusts also provide long-term asset protection beyond probate avoidance.
Asset Protection
Assets in a revocable trust remain part of the grantor’s estate and are subject to creditor claims. In contrast, irrevocable trusts remove assets from the grantor’s estate, shielding them from creditors, lawsuits, and providing robust asset protection.
Tax Benefits
Revocable trusts do not offer significant tax advantages since the assets are still considered part of the grantor's estate. Irrevocable trusts can help reduce estate taxes by removing assets from the taxable estate, which may lower estate tax liability for beneficiaries.
Incapacity Planning
Revocable trusts allow appointment of a successor trustee to manage assets if the grantor becomes incapacitated without the need for court intervention. Irrevocable trusts usually transfer control immediately to a trustee, so incapacity planning is inherent but less flexible.
In summary, revocable trusts offer greater control, flexibility, and ease of adjustment but limited protection and tax advantages. Irrevocable trusts sacrifice control and flexibility for stronger asset protection and tax benefits, suitable for long-term wealth preservation and specific purposes such as Medicaid planning or charitable giving.
Trusts can hold a variety of assets such as money, real property, stocks, bonds, a business, or a combination of many types of properties or assets. They can be named as the beneficiary of an individual retirement account (IRA), but they'll be subject to accelerated withdrawal requirements and short-circuit spousal inheritance provisions.
The parties involved in establishing a trust are the grantor, the beneficiary or beneficiaries, and the trustee. The trustee is responsible for carrying out the interests and wishes of the grantor, including allocating living expenses, educational expenses, and transferring property to the beneficiary or beneficiaries after death.
Trusts like the Spendthrift trust, Land trust, Marital trust, Grantor Retained Annuity trust, Qualified Terminable Interest Property, Asset Protection trust, Special Needs trust, and Blind trust each have their unique features and purposes. For instance, a Spendthrift trust limits beneficiaries' access to assets, with money and assets being released to them incrementally. The trustee is granted discretion as to when to transfer inheritances to them and how much.
An irrevocable trust fund is virtually immune to estate taxes and creditor claims. It can provide robust asset protection, tax benefits, and long-term wealth preservation. However, it requires the grantor to permanently give up control and ownership of the assets and money placed into the trust.
[1] Investopedia. (2021). Revocable Trust. [online] Available at: https://www.investopedia.com/terms/r/revocabletrust.asp [2] LegalZoom. (2021). Irrevocable Trust. [online] Available at: https://www.legalzoom.com/learn/estate-planning/irrevocable-trust [3] Nolo. (2021). Revocable Living Trust. [online] Available at: https://www.nolo.com/legal-encyclopedia/revocable-living-trust.html [4] AARP. (2021). What Is a Living Trust? [online] Available at: https://www.aarp.org/money/estate-planning/info-2019/what-is-a-living-trust.html [5] Forbes Advisor. (2021). Irrevocable Trust vs. Revocable Trust. [online] Available at: https://www.forbes.com/advisor/investing/irrevocable-trust-vs-revocable-trust/
The estate planning tool called irrevocable trust, different from a revocable trust, offers long-term asset protection and tax benefits by removing assets from the grantor’s estate, shielding them from creditors, lawsuits, and potentially reducing estate taxes for beneficiaries.
Finance-savvy individuals may create an irrevocable trust fund, which is virtually immune to estate taxes and creditor claims, to secure robust asset protection, tax benefits, and long-term wealth preservation. In this scenario, the grantor must permanently give up control and ownership of the assets and money placed into the trust.
