McClellan Legal LLC Estate Planning & Tax Assessment Blog

Monday, January 21, 2019

Trusts 101: Balancing Protection & Control

Some people are initially hesitant to discuss trusts in their estate plan.  They think that a trust is too complicated, too expensive, or simply unnecessary for their relatively modest estate.  However, everyone should understand how trusts work and then decide if trust planning should be implemented to protect their family.

Types of Trusts

Trusts come in many different varieties.  The two most common 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 (e.g., to reduce the cost of probate) and testamentary trusts are triggered upon your death when certain conditions exist (e.g., minor children). 

Additionally, trusts may be either revocable or irrevocable.  Quite simply, you can change a revocable trust, but 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.   

 Trust Roles

A trust is a legal relationship that defines rules for how assets are to be managed.  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 because 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. 

 Trusts Provide Protection

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 reduces opportunities for creditors, former spouses, government entities, or taxing authorities from reaching your assets or your beneficiary’s inheritance. 

Outright distribution distributes assets to your beneficiaries 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 be very limited. 

By contrast, trusts may provide varying levels of asset protection, including 1.) financial immaturity of a beneficiary, 2) creditors, 3.) divorce, 4.) ensuring a legacy, and 5.) tax planning.  The amount of asset protection is dependent on the amount of control the beneficiaries have over the trust assets.  If you would like your beneficiary to have a great deal of control over the trust assets, then the trust will not provide a lot of 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 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.

If you are interested in exploring the use of trusts in your estate plan, please call our office to schedule a free consultation.

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