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What Is a Trust?

What Is a Trust?

When it comes to estate planning, avoiding the probate process is arguably the most important goal you have. Probate takes a long time, can cost thousands of dollars, and lead to a lot of stress for your loved ones who you wish to take care of. To do this, you have a number of estate planning tools that you can use to set up your estate to pass on to your loved ones how you would like, and do so legally.

Arguably the most versatile and useful type of tool is a trust. Trusts are an arrangement whereby someone who owns property, the grantor, gives control of the property over to a trustee, who manages it until it is to be passed on to the beneficiary. The terms whereby this management and passing of possession happens are all detailed as terms of the trust, and this gives them the ability to be passed on while avoiding the hassle of the probate process and even some estate taxes.

There’s a common misconception about trusts—many people think of “trust funds” or anything to do with trusts as something that’s reserved only for the wealthiest people. The truth of the matter is nearly anyone can benefit from creating a trust and using it to pass their possessions to their loved ones. While it’s true that some specific types of trusts are used by wealthy individuals in order to minimize the impact of the death tax, nearly everyone could use

Revocable vs. Irrevocable

There are two primary types of trusts: revocable living trusts and irrevocable living trusts. Revocable living trusts are arguably the most popular because they grant the strongest amount of flexibility. Revocable living trusts are set up by an individual during their lifetime, and can be changed, modified, or cancelled (revoked) at any time. This is because the person creating the trust can act as both the grantor and the trustee, giving them total control.

This type of trust is particularly useful for those who don’t own a large amount of wealth or assets, but are still seeking tax efficiency. Revocable living trusts are still considered to be a part of your taxable estate, and as such if you place too much in revocable living trusts, you could still find your estate subject to estate taxes. That being said, the 2019 estate tax exemption is $11.4 million per individual—way more than the average person owns. So as long as your total estate is valued below that amount, including the value stored in revocable living trusts, your loved ones won’t be subject to estate tax.

Irrevocable trusts are considerably different. While they are also created during someone’s lifetime, the grantor cannot also serve as the trustee—a trusted third party must be named for this role. Likewise, once the trust is created, it cannot be revoked or cancelled. In fact, about the only thing that can be changed is who the beneficiaries or trustees are.

More often than not, these trusts are created to help prepare for long-term care needs and preserve eligibility for things like Medicare or Medicaid, which have wealth or income-dependent qualifications. Likewise, they can also help with avoiding estate taxes—depending on how the trust was set up, it can be taxed as an entirely separate entity from your estate, thus helping you avoid estate taxes. However, the trust must be set up properly to do this.

Special Needs Trusts

Special needs trusts are a type of irrevocable trust designed to care for someone who will need long-term care. This is a tool often used by family members to set up a long term-financial support system for a child or other loved one who is disabled either physically or mentally. This way, once the grantor has passed on, their loved one will continue to get the care they need, either from a full-time nurse, continual medical treatments, or much more. And the best part: these funds will more than likely avoid the estate tax, ensuring that the person they’re intended for receives them in full.

Do you need help setting up a trust? Call Fitzpatrick Santos Sousa Perugini, PC at (203) 583-8299 and let our Connecticut estate planning lawyers ensure your future is set up to achieve your goals!