Trusts are an important estate planning tool that often doesn’t get enough explanation, or gets just enough explanation to make it even more confusing. When utilized in the proper situation, a trust can save money (whether through tax savings, reduced attorney fees, or reduced estate administration fees), protect assets, assist in benefit qualification, and provide for children, to name just a few.
There are many different types of trusts, and the type utilized by your attorney will depend on your situation and your wishes regarding the maintenance and distribution of your estate. However, the two most basic trust types are the revocable trust (or living trust, as it is also called) and the irrevocable trust. The main difference between these trusts? It’s the ability of the grantor to change the terms and beneficiaries of the trust, and like you’d expect, a revocable trust can have its terms changed by the grantor, while an irrevocable trust cannot. Now, the reasons and uses for each type of trust vary, but generally speaking, a revocable trust is a tool to avoid probate and retain control over the trust assets, and an irrevocable trust is a tool to minimize estate taxes or assist in the protection of assets for government benefit purposes (the irrevocable trust will also help minimize probate expenses and/or retain control over trust assets). Since a discussion regarding the use of an irrevocable trust for protection of assets for government benefit purposes can be found here, let’s look an example of where revocable trust planning can benefit a family.
Susan and Steven own their home in North Carolina that was purchased after marriage, a beach house in South Carolina, and a 10 acre family farm in Georgia that Susan inherited from her parents. Susan and Steven have basic wills that leave their property to each other, and then to their children upon the death of the last of them. Steven dies of natural causes at age 70. As you can read about on our site here, Steven’s interest in the home in North Carolina will automatically pass to Susan due to the fact that they owned it as tenants by the entirety. But what about the South Carolina beach property? Or the farm in Georgia?
Property owned by two people is normally viewed as being held by the owners as tenants in common (a definition of which can be found here). Upon the death of one of the owners, that owner’s tenancy in common interest is distributed to the heirs of the decedent – either according to their will or the intestate laws of that deceased person’s state of residence. Here, we’re assuming that Susan and Steven were owners of the properties in South Carolina and Georgia as tenants in common. Therefore, Steven’s interest in the real property in those states must be distributed in accordance with his will – and that requires probating of Steven’s will.
Probating Steven’s will wouldn’t be bad if it only needed to be done in Steven’s state of residence. However, in order to pass real property, most states require some form of probate to pass the real property interests to a decedent’s heirs. That means more cost and more time. So how could this be avoided?
Susan and Steven could have established a joint revocable trust, and transferred ownership of the real property to themselves (or anyone they desired) as Trustees of their joint revocable trust. By consolidating ownership in the trust, there would be no need to probate Steven’s will to pass his interest to Susan, nor would there be any need to probate Susan’s will (upon her death) to pass the property to the children. All of that could be done through the joint revocable trust.
Additionally, let’s say that Susan and Steven’s son, Steven Jr., has Down Syndrome, and that he is currently receiving government benefits in the form of SSDI and Medicaid. By utilizing a revocable trust, Susan and Steven could make certain that the share of their estate that would be distributable to Steven Jr. upon the death of both of them would not cause Steven Jr. to be disqualified for Medicaid or SSDI. They could, under the terms of the trust, give Steven Jr.’s share to a Trustee, who would hold his share for his benefit. This would ensure that the money Steven Jr. was entitled to under their estate was available for all of his needs, both immediate and in the future.