Trusts

Revocable Trusts

Also referred to as Living Trust or Inter Vivos Trust, a revocable trust allows you to retain control of all the assets in the trust. This means you are free to revoke or amend the terms of the trust at any time. A living trust can help you in the event that you become mentally incapacitated but remain alive. You can also place assets in a trust at the time of your death and avoid probate to protect the privacy of your property and beneficiaries after you die.

It is important to understand that certain kinds of trusts offer no creditor protection if you are sued. All of the trust assets will also be considered yours for Medicaid planning purposes. You will also be taxed for estate tax purposes and all assets held in the name of the trust at the time of your death will be subject to both state and federal estate taxes and state inheritance taxes.

The estate planning attorneys at The Law Offices of Diron Rutty will guide you through the process of deciding which of the trust options best fits your needs.

Irrevocable Trusts

An irrevocable trust is simply a trust that cannot be changed or revoked after the Trust agreement has been signed, or is a revocable trust that becomes irrevocable after the grantor dies. The assets no longer belong to you once they go into this trust but rather, they belong to the trust, and you cannot make changes without the beneficiary’s consent. But the appreciated assets in the trust aren’t subject to estate taxes.

Irrevocable trusts can take on many forms and can be used to accomplish a variety of estate planning goals, such as: 

• Reducing estate taxes 
• Protecting assets 
• For charitable estate planning purposes

There are different subtypes of trusts and some are more complicated than others. They can be used in different situations and serve different purposes. For example:

• Testamentary Trust
• Irrevocable Life Insurance Trusts
• Credit Shelter or Bypass Trusts
• Charitable Estate Planning
• Special Needs Trusts

Testamentary Trusts

A Testamentary Trust does not go into effect until the grantor dies. This type of trust is usually made within a will and, when created, is utilized as a trust for minors. Upon the grantor’s death, the trust becomes irrevocable. The grantor, therefore, has the power to amend or make changes to the trust until his or her death.

Irrevocable Life Insurance Trusts

These are commonly used to remove the value of life insurance from your taxable estate, transfer it into an irrevocable trust, and relinquish control to the Trustees and Beneficiaries of the trust. This makes it so that the property in the trust cannot be taxed when the individual dies. If the policy is removed from the estate, ownership rights are surrendered, which means the grantor may no longer borrow against it, or change beneficiaries. The proceeds from the policy may be used to pay any estate costs after death and provide beneficiaries with tax-free income.

Credit Shelter Trusts or Bypass Trust

With a credit-shelter trust (also called a bypass, AB, or family trust), one spouse is allowed to pass the property and assets they own at the time of death to the surviving spouse without the property being taxed. The couple sets up an AB Trust system under the couple’s Last Will and Testament, which will shield the assets of both spouses from federal estate taxes when they die.

In order to take advantage of the estate tax break, both spouses must set up the “A Trust” referred to as “Marital Deduction Trust”, “Marital Trust” or “QTip Trust.” The amount of deduction is used to fund the “B Trust” which is also commonly referred to as the “Bypass Trust.” Once the money is placed in a bypass trust, it is forever free of estate tax, even if it grows.

When the first spouse dies, the assets specified by the settlor-spouse pass to the marital trust clear of all federal estate taxes. Neither the settlor-spouse nor the surviving spouse has to pay estate taxes on the property. When the surviving spouse dies, the assets in the trust are not included as part of their estate. So the federal estate taxes are not as high as they would have been if there had been no trust. If the value of the deceased spouse’s estate exceeds the estate tax exemption, the A Trust will be funded for the benefit of the surviving spouse, and payment of estate taxes will be deferred until after the surviving spouse dies.

There are several requirements that must be met. It is important that you understand the federal tax laws before preparing a marital trust. If you are considering a marital deduction trust, seek the advice of estate planning attorneys who will help you and your spouse set up the AB Trust.

Charitable Estate Planning

Another common use of an irrevocable trust is to accomplish charitable estate planning, such as through a Charitable Remainder Trust or a Charitable Lead Trust. The charity must be approved by the IRS, which usually means it has tax-exempt status under the Internal Revenue Code. 

The charity serves as trustee of the trust and manages or invests the property so it will produce income for you. If the grantor makes the initial transfer of assets into a charitable trust while still alive, then the charity pays the trust maker a portion of the income generated by the trust property and the grantor receives a charitable income tax deduction in the year that the transfer is made. 

Or, if the initial transfer of assets into a charitable trust doesn’t occur until after the grantor’s death, then the grantor’s estate will receive a charitable estate tax deduction.

Special Needs Trust

A Special Needs Trust is created to enhance the quality of life for a person with a disability and enable them to continue to receive financial assistance without becoming ineligible for governmental benefits. 

A supplemental-needs trust is created for someone with a disability who needs to be able to obtain or retain Medicaid. This allows them to use part of their funds from a gift, an inheritance, or a settlement of a legal action.