What is a trust? Do You Need One?
A trust is a contract between the Grantor (the person who creates the trust), the Trustee (one who controls the trust) and the beneficiaries (those entitled to benefit from the trust). You, as Grantor, determine how the trust will be operated by the Trustee and who benefits, how and when.
You can create a Revocable Living Trust that permits you to be Trustee and grants you the right to use the trust assets for your benefit. A Revocable Living Trust is commonly utilized as a substitute to your Will. It allows you to maintain total control and access to all your stuff while alive, and provides for the distribution of your assets to your beneficiaries at your death. While alive and capable, you can amend or revoke your Revocable Living Trust. A properly drafted and funded (where ownership of all your stuff is transferred into your trust during your lifetime) Revocable Living Trusts allows you to avoid having to probate your stuff, which is required if you use a Will to distribute your assets after death. A Revocable Living Trust significantly reduces the time and expenses associated with the probate administration process that exists if you have a Will. However, a Revocable Living Trust does not totally avoid the probate court in Connecticut because the Connecticut Estate Tax Return must still be filed with your local probate court, and a probate fee will be owed.
Other advantages of Revocable Trusts, when property drafted, can include:
- Asset protection for your spouse after your death.
- Special needs planning for disabled beneficiaries.
- Asset management and protection for children who are not good with handling money.
- Protection of assets from a spouse’s subsequent marriage after your death.
- Disability planning in case you become disabled prior to death.
- Asset protection for your children if in bad marriages or to avoid having your stuff go to the “in laws.”
- Keeping your affairs private (as opposed to open for public review in probate).
- No court intervention required (handled entirely by Trustee you name in accordance with your detailed instructions).
- Plan for proper management of your business in your absence.
Unlike a Revocable Trust that allows you to maintain full control (as Trustee) and have access to all your stuff (as beneficiary), an Irrevocable Trust may limit or prohibit your right to control the trust (as Trustee) or have access to your stuff, but you get to decide to what extent. It is a common misconception that irrevocable trusts cannot be changed. While that is true of many irrevocable trusts created to avoid estate taxes, it is not true of irrevocable trusts used for asset protection from lawsuits, nursing homes or other creditors and predators. An irrevocable trust is a trust you create for the benefit of yourself or others and once created, you, as Grantor, must give up your right to something. Debtor/Creditor law provides that whatever you can access, your creditors can access. You can have known creditors (i.e., credit card debt) or unknown potential creditors (unforeseen lawsuits, nursing home, divorce). An “income only” irrevocable trust allows you to receive only the income on your stuff, but you must give up your right to take your stuff back. In some irrevocable trusts, you can retain the right to change who gets your stuff during your life and after your death, and maintain complete control of your stuff until you become incapacitated or die (asset protection trusts).
Irrevocable Trusts designed to avoid estate taxes are much more restrictive than asset protection trusts. You cannot retain any right to control or access any of your stuff in an irrevocable tax reduction/avoidance trust. There are many irrevocable trusts available that are quite flexible and grantor-friendly.
Is a trust right for you?
While a trust is not needed for everyone, a trust may be necessary for anyone looking to minimize probate expenses and delays, reduce or eliminate estate taxes, protect their assets from future nursing home expenses or other predators, or protect assets for their beneficiaries should the beneficiary divorce, become disable, or get sued.