The Significance of Trusts

The purpose of trusts, and of estate planning in general, is to allow complete control over our property. Trusts in particular are used to set up someone to take care of your assets. This is useful if your survivors are minors, unfamiliar with financial affairs, or incapacitated.

Trusts can also give you greater flexibility in asset distribution. There are many kinds of trusts, and they can be hard to explain. For that reason, I am only going to explain the most prevalent forms of trusts. If you need additional information about trusts, be sure and seek professional help from an estate attorney.

Irrevocable and Revocable Trusts

The two common forms of trusts are revocable trusts, and irrevocable trusts. The most prevalent trust is a revocable trust, also known as revocable living trusts. The assets put into a revocable trust stay in control of the maker of the trust.

A revocable trust can be revoked at any time, and the assets will be returned to the maker of the trust. Alternatively, you have irrevocable trusts. These are the opposite of revocable trusts, and they cannot be revoked by the maker of the trust.

What is a Revocable Trust?

Revocable trusts don’t have the ability to provide the maker of the trust with asset protection. However, revocable trusts are useful because they can help provide disability planning, overall privacy, and avoidance of probate.

The biggest downside of revocable trusts is that they only control property that was transferred to them during your lifetime. It cannot control property outside of the trust, even if the you intended for it to be in the trust at the time of your death.

When the maker of the trust dies, their revocable trusts become irrevocable trusts. Trusts also become irrevocable when the first spouse of a joint trust dies. When the trust becomes irrevocable, it provides a measure of asset protection. However, in order for asset protection to occur, two conditions must be met.

The first condition is that assets must be kept within the trust. Once assets are distributed to a beneficiary, the assets are considered owned by that beneficiary. They will be attached to them, and can be claimed by their creditors. They can also be claimed by the creditors of their spouse, if applicable. The second condition is that the more rights a beneficiary has regarding trust distribution, the less protection a trust will provide.

Since creditors can access everything that a debtor can, they can also use any rights that they may have. If a debtor has the ability to make a trust distribution, so do their creditors. Finally, revocable trusts are useful in the case of a divorce. Divorce rates in the United States are nearing 50 percent, and the odds of having a divorce are high. If your assets are kept in a revocable trust, you can remove any ex in-laws from your trust.

What is a Irrevocable Trust?

Unlike revocable trusts, irrevocable trusts can protect your assets from creditors. This is because the trust controls and owns the assets, and you don’t. If they create an irrevocable trusts and names themselves the beneficiary of the trust, the assets are not protected from creditors. In some states, you can get around this by creating a domestic asset protection trust.

There are currently 15 states where this is an option. Under this form of a trust, a trust maker can be the beneficiary of an irrevocable trust and still have their assets protected by creditors. The drawback is that any distributions from this trust must be made by an independent trustee. Creating this kind of trust will not work if the transfer is done with the intent of defrauding or hindering a creditor. If it was not done to defraud a creditor, then courts will generally respect the transfer of assets.

The most prevalent type of irrevocable trust is known as an irrevocable life insurance trust. It can also be called a wealth replacement trust. Irrevocable life insurance trusts come in two forms. The first is an individual trust, which usually owns a single policy on the life of the maker of the trust. The second is a joint trust, which can be created by a couple.

These typically include a survivorship policy on both individuals. Under many state laws, creditors are able to see the cash value of life insurance policies the debtor has. Even in states where life insurance is protected from creditors, proceeds upon death are included in the total estate, for any estate tax purposes. This can be avoided by transferring your insurance policy to an irrevocable life insurance trust, and then naming yourself as the beneficiary of that trust.

The provisions included in the trust are almost always the same as the provisions put into the revocable living trust, or revocable living will, made by the maker of the trust. Since this is an irrevocable trust, you are able to grant an independent trust protector the ability to modify the terms of the trust in the event of unanticipated life events.

If, for whatever reason, you are concerned about being able to access the cash value of any insurance plans while you are alive, there is one thing that you can do. You are able to give one of your trustees the power to make loans to you. They will also have the ability to handle distributions to your spouse. With these provisions, any life insurance proceeds will not be counted in your estate for estate tax purposes.

While I attempted to explain the importance of trusts, I could not cover all of the forms of trusts available. If you still have questions about what trusts do, and the types of trusts you can create, consider consulting an estate planning professional. Estate planning professional can help you figure out how to best protect your assets from creditors, and how to best protect your beneficiaries from creditors as well. They can also answer any questions about more complex trusts.