A common method to protect valuable assets and manage their use is placing them in a trust. The grantor creates the trust then transfers assets to it, naming a trustee to manage the assets and beneficiaries to receive or enjoy the assets. Planning with a Trust is attractive because families can avoid the probate process and court involvements, while enjoying some significant tax benefits. Trusts are broken into two main categories, and each has its particular uses.
A revocable trust allows the grantors the freedom to make changes to the trust at any point during their lifetimes. This includes adding more assets, selling trust assets and adding or removing beneficiaries. In most revocable trusts, the grantors name themselves as the initial trustees in order to maintain control of their trust property while they are alive. A successor trustee is named to manage the trust after the grantors’ death or in the event they become incapacitated.
Upon the grantors’ death, the revocable trust reverts automatically to an irrevocable trust, meaning it cannot be revoked, because only the grantors had the power to revoke it. The successor trustee must then follow the instructions within the trust for distributing the trust’s assets; however, the trustees can make modifications to the trust if the laws and circumstances of the family change, or the original plan has negative consequences unforeseen and not intended by the grantors. Revocable trusts are flexible options for estate planning, but there are some drawbacks.
- Assets in a revocable trust are counted as part of the grantor’s taxable estate and if the assets exceed $12,920,000 (unified credit as of 2023), they are subject to estate taxes upon the grantor’s death.
- Revocable trust assets are not protected against claims from creditors or lawsuits filed against the grantor during his or her lifetime. Debts or legal settlements could therefore rob the trust of assets, leaving only what is left for the beneficiaries.
An irrevocable trust is a tighter type of trust that cannot be changed by the grantor once it is executed, but it can still be modified by the trustees with the grantor’s and certain beneficiaries’ permission. Assets are added to the trust in the same way by the grantor, but once added, the grantor does not enjoy the freedom to make changes to the trust at will.
While the grantor does not have much of control over an irrevocable trust, these trusts do pose certain attractive benefits for estate planning.
- Irrevocable trusts are not subject to creditor claims or lawsuit settlements against the grantor. Assets placed therein are protected from seizure or loss if the trust was set up prior to the rise of the claim.
- Certain irrevocable trusts can be used to remove assets from the grantor’s taxable estate, and exclude them from estate taxes on the grantor’s death.
- In Medicaid planning, the assets in the trust do not count as resources of the grantor.
Which Type of Trust is Best for You?
Choosing the best type of trust for your situation requires some careful thought and planning. Viktoria Beress, an Experienced Estate Planning Attorney from Beress & Zalkind PLLC who is admitted to practice law in New York, New Jersey and Florida, can offer sound advice and helpful recommendations for how each type of trust can benefit your overall estate plan goals.
For example, you may want to choose a revocable trust:
- To avoid probate and keep the transfer of your assets to beneficiaries private.
- To avoid probate if you own real estate in multiple states.
- To maintain control, management and use of your assets during your lifetime.
- To keep the freedom of changing beneficiaries for your trust.
- If the value of your estate is less than the federal estate tax exemption.
You may want to choose an irrevocable trust:
- To avoid estate taxes if the value of your assets is higher than the federal estate tax exemption.
- If you are comfortable surrendering use and control of your own assets.
- To protect assets from creditors and lawsuits.
- To apply for Medicaid.
Setting up a trust can be complicated, due to the many factors that can be involved. Beress & Zalkind PLLC is an established and experienced New York Estate Planning Law Firm that an assist you with guidance and legal services to establish, manage and execute revocable and irrevocable trusts. Contact us today to schedule a confidential consultation about trusts and estate planning in New York, New Jersey and Florida.