McClellan Legal LLC Estate Planning & Tax Assessment Blog

Tuesday, January 6, 2015

Trusts: The Basics (Article 1 of 8)

Some of my clients are initially hesitant to implement trusts in their estate plan.  They may think that a trust is too complicated, too expensive, or simply not necessary for their relatively modest estate.  We have drafted a series of eight articles to define the different types of trusts and explain how trusts may be used in different situations to protect your assets while you are alive and/or for your beneficiaries after your death.  This first article explains trusts basics and is a good starting point for explaining how trusts may be used in seven common situations:


  • Trusts for Minor Children

  • Trusts for Second Marriages

  • Trusts for Tax Planning

  • Trusts for Adult Beneficiaries

  • Trusts for Retirement Accounts

  • Trusts for Life Insurance

  • Trusts for Special Needs Beneficiaries


What are the Different Types of Trusts?

Trusts come in many different varieties.  The two most common initial options when designing a trust include: living trust v. testamentary trust and revocable trust v. irrevocable trusts.  Living trusts are created while you are alive and testamentary trusts are triggered upon your death when certain conditions exist (e.g., you have minor children). 

Additionally, trusts may be either revocable or irrevocable.  Quite simply, you can change a revocable trust and it is difficult (although not always impossible) to change an irrevocable trust.  Irrevocable trusts add greater asset protection than revocable trusts.  As we progress through each of the next seven articles, we will explain how these basic categories of trusts are used to create asset protection for different specific situations.   


What Are The Different Trust Roles?

It is important to broadly define a trust.  A trust is a legal relationship that defines rules for how trust assets are to be managed by a trustee for a beneficiary.  Each trust has three roles: grantor, trustee, and beneficiary.  The grantor creates the trust and defines the trust rules.  The trustee manages the trust assets as defined by the rules.  The beneficiary is the role that we all want; the beneficiary receives trust assets in accordance with the trust rules.  Quite often, one person may serve more than one of the three trust roles.  In fact, sometimes one person may be the grantor, the trustee, and the beneficiary at the same time. When discussing the specific types of trusts over the next several weeks, we will explain how each role is implemented in the specific trusts. 


What is the Primary Purpose of a Trust?

There are two primary ways for your beneficiaries to receive an inheritance:

  • An outright distribution or

  • A distribution via a trust.

The decision to use a trust is often based on your desire to add some level of asset protection for your beneficiary.  Asset protection planning is concerned with legally reducing the opportunity for creditors, former spouses, government entities, or taxing authorities from reaching your assets or your beneficiary’s inheritance. 

Outright distribution is the method of distributing assets without any restrictions.  For most types of assets, outright distributions do not naturally provide any meaningful asset protection.  A few possible situations where assets may have asset protection even without a trust include some home equity, some retirement accounts, and some business interests covered by an LLC or a partnership.  However, even in these situations, the asset protection may not exist or may be very limited. 

In contrast, trusts may provide a huge amount of asset protection or very little asset protection.  The amount of asset protection is dependent on the amount of control the beneficiaries have over the trust assets.  That is, a trust with a large amount of asset protection will likely not provide very much control by the beneficiary over the trust assets.  In contrast, if you would like your beneficiary to have a great deal of control over the trust assets, then the trust will not likely provide very much asset protection.  

While most of my clients implement one or more trusts in their estate plan, a “simple will” with outright distributions may be the best option for some people.  We simply do not know if a simple will is adequate until we discuss your particular family and financial circumstances.   It is not our goal to overcomplicate an estate plan.  In every situation, your facts will dictate the strategies that we recommend.

The upcoming seven articles will describe how we design different types of trusts for specific situations by balancing the amount of asset protection created via the trust with the loss of control by the beneficiary.  If you are interested in exploring the use of trusts in your estate plan, please call our office to schedule a free consultation (610.444.5552).   

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McClellan Legal LLC is located in Kennett Square and serves clients throughout the areas of Avondale, Chadds Ford, Coatesville, Downingtown, Landenberg, Oxford, Phoenixville, Pottstown, West Chester, & West Grove.

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