Trusts with a Cap on Changes versus those with Permanent Status: Grasping the Distinctions and Picking the Right One

In the realm of estate planning, trusts play a significant role in managing and distributing assets. Two common types of trusts are irrevocable and revocable trusts, each with its own advantages and disadvantages.

Irrevocable Trusts

Irrevocable trusts are legal entities that the grantor (the creator of the trust) cannot modify or revoke once established. Hiring a financial advisor or estate attorney is often advisable when setting up an irrevocable trust, as they can help navigate the complexities of this type of trust.

One key advantage of irrevocable trusts is the stronger protection they offer from creditors and legal claims. Examples of irrevocable trusts include an irrevocable life insurance trust (ILIT), which owns a life insurance policy and receives the death benefit proceeds, and an intentionally defective grantor trust (IDGT), where the grantor transfers assets into the trust and still pays income taxes on the income from those assets, but is not considered the owner for estate tax purposes.

Irrevocable trusts also help bypass probate, keeping the details of the trusts private instead of becoming public record. Moreover, they provide more effective estate and succession planning, as the trust terms cannot be changed once established. However, the grantor must give up control and ownership of their assets.

Revocable Trusts

On the other hand, revocable trusts can be modified at any time while the grantor is alive. Also known as living trusts, revocable living trusts, or inter vivos trusts, these trusts become effective as soon as the legal document is signed and assets are titled in the name of the trust.

Revocable trusts offer several benefits. They help manage and distribute assets, avoid probate (in some cases), and provide protection in case of the grantor's incapacity. Furthermore, they preserve privacy, unlike a will, which becomes active only when the grantor dies.

However, revocable trusts do not offer protection from creditors and do not provide estate tax benefits. Many people use revocable trusts to help their heirs and estates bypass the probate process, which can be time-consuming and costly in some states.

Special Types of Trusts

There are several special types of trusts, each with its unique features. For instance, a spousal lifetime access trust (SLAT) moves assets out of a taxable estate during the grantor's lifetime, allowing the spouse or children to receive distributions to help support the grantor. A qualified terminable interest property trust (QTIP) provides an income stream and use of property to the surviving spouse, with assets transferring to the final beneficiary upon the surviving spouse's death.

A dynasty trust, a type of irrevocable trust, passes assets from generation to generation, helping to mitigate the impact of taxes (estate, gift, or generation-skipping tax) as long as there are assets remaining in the trust. A spendthrift trust, set up for a beneficiary who may not be capable of managing the assets on their own, offers protection for the assets.

Finally, a qualified personal residence trust (QPRT) is similar to a grantor-retained annuity trust (GRAT), but the trust asset is real estate, and the grantor can live in the property rent-free for a period of time before it's gifted to heirs. A bypass trust, also called a credit shelter trust or AB trust, is often used by married couples to reduce estate taxes on certain assets.

Conclusion

Understanding the differences between irrevocable and revocable trusts, as well as the various types of trusts, is essential when planning your estate. It's always advisable to consult with a financial advisor or estate attorney to ensure that your trust aligns with your financial goals and personal circumstances.

Trusts with a Cap on Changes versus those with Permanent Status: Grasping the Distinctions and Picking the Right One