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An Introduction to Trusts

Part of my job duties is to teach topics in the morning for planners, sometimes the topics are pretty advanced and sometimes they are simple.  Tomorrow I have to teach an intro classes on Trusts and so I thought I’d share some of the stuff I will be going over.

The best way to think about a trust is as a box…a separate entity that controls assets in which the grantor/settlor (person creating the box) makes the rules.

The word “Trust” or someone telling you an asset is held “in trust” provides very little information

There are two times when a trust can be created:

  • Testamentary Trust
  • Inter Vivos Trust

A Testamentary trust comes into existence at someone’s death.  So for example in my Will, I wrote that if my child (don’t have one yet) is to receive assets and he is under the age of 35 this box is going to control payouts according to rules I made.

An Inter Vivos Trust is one which is created during the life of the grantor/settlor.  A great example for this is a family income trust where I gift $x to this box every year while I am alive.

Got the time frame part down?  Alright now we have a type of Trust – it either be:

  • Revocable; or
  • Irrevocable

This one is pretty self explanatory, but if I crate an irrevocable trust it can’t be changed, modified or altered (note: it can be changed, modified or altered if you have a smart enough financial planner or attorney, but that is a whole different advanced topic).  If I create a revocable trust it can be revoked, modified, changed, destroyed etc. whenever I, as Grantor/Settlor feel like it.

It should be noted that most revocable trusts become irrevocable upon death of the Grantor.  WELL DUH! the Grantor is dead how the hell is he or she going to come back and change the legal document?  Similarly a testamentary trust would be pretty hard to revoke since it doesn’t even come into existence until the grantor is dead!

Alright so lets combine the two concepts we can create:

  • An irrevocable inter vivos trust (i.e. a Life Insurance Trust or Family Income Trust);
  • A Revocable inter vivos trust (this is your common run of the mill Living Trust).

Irrevocable vs. Revocable Trusts

Alright, this topic can get a bit complicated so we are going to just skim the surface and offer an introductory glance (mainly cause that is what I am teaching tomorrow and it is already 1a.m.).

The benefits of gifting an asset to an Irrevocable Trust are:

  • In most states you get some sort of creditor protection
  • You make up the rules for you heirs
  • Depending on our set up the assets may pass free of estate tax

The main downfall, and it is a biggie, the asset is not yours!  You have gifted it into this box, so if you change your mind it can be a problem.

Which brings us to the main benefit of a revocable trust – you still control your assets, and if done properly (and 75% of time it is not) you may be able avoid probate.  Let me make it abundantly clear, a revocable trust will not in it of itself save on estate taxes.  Whether it saves on estate taxes is determined by how the document is written.

I think this is a great start to this vast vast topic.  Throw any questions out there and I’ll be happy to answer them and continue this line of posts.



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