When we are helping our clients determine what options they may want to take in crafting their estate plans, we occasionally recommend a trust. While they definitely aren’t for everyone, trusts can be a solution for Virginians looking to leave behind assets in particular scenarios. It’s important, if you’re looking to create a trust, to first have a good idea of what they are for—what they can do and what they can’t.
Not all trusts are created equal. In fact, a fundamental element of them is the time of their creation: whether a trust is formed while you are still among us (which is called an ‘inter vivos’ trust, and on which we will focus here) or is designed to go into effect after a person has passed (a ‘testamentary’ trust“).
Inter vivos trusts are separated into “revocable” trusts and “irrevocable trusts.”
If you establish a revocable trust, you can access it practically without limit. That money is still yours to use. Of course, this has tax implications: revocable trusts are still taxed as personal assets. And further, creditors can stake claim to them for debts unpaid.
Irrevocable trusts, on the other hand, are considered their own legal entities—similar to how a corporation is considered legally separate from its founder. If you create one of these, what you are doing is placing assets completely outside your control, to be used instead for your loved ones. This then makes those funds unavailable to both you and to creditors. (Of course, this does mean the funds cannot be directly used for your personal long-term care). It may also serve to significantly reduce the amount of taxes that could be levied upon the funds by the federal government, especially as compared to passing through probate or being subject to estate taxation.
The type of irrevocable trust you decide to use would depend, of course, on the reason you might have for creating a trust in the first place.
For example, a “spendthrift trust” may be useful if the loved one you would like to benefit from what you leave behind has creditors of their own that might stake a claim to your estate. The trust would not be accessible in lump sum to those creditors.
If you have a loved one with disabilities, you could form a “supplemental needs” or a “special needs” trust, since an inheritance might otherwise cause them to be ineligible for public benefits such as Medicaid. With this sort of trust in place, their day to day expenses can still be planned for.
“Bypass trusts,” also known as “Credit Shelter” trusts, are rarely used under today’s estate tax provisions, but some clients may find they fit their needs. These trusts are usually used between well-off married couples to decrease estate taxes after the second spouse dies and the estate is passed to their heirs.
Contact Us to Create a Trust to Protect You and Your Family
If you are considering establishing a trust or wondering about other ways to plan for the future, attend one of Promise Law’s free estate planning workshops. These workshops provide a great foundation of information that everyone needs to be able to make good estate planning decisions. Moreover, if you attend a workshop you also get a complimentary one-on-one consultation with one of our attorneys.