There is no difference between a trust and a living trust. “Trust” is used as an umbrella term that encompasses trusts such as living trusts, special needs trusts, and joint trusts, to name only a few. Trusts are considered separate entities that manage a person’s assets. The person who manages the assets of a trust is called a trustee, and he or she manages the assets based on the terms of the trust document.
In estate planning, living trusts, also known as intervivos trusts, are the most common type of trust. You’ll want to learn about this type of trust to help you make the best decision in your estate planning.
A living trust is referred to as such because it is created during your lifetime and then, usually, transferred to designated beneficiaries after you pass. You can include anything and everything within your trust, but you must designate those assets as trust assets. These can include money, automobiles, stocks, intellectual property or even real estate.
The benefits of putting property into a trust means that there are no extra taxes to pay, as the trust does not increase your tax rate. Also note that the property in a trust does not go through probate because a trust is considered to be a contract.
Individuals should also be aware that trusts that are created in wills are not considered to be living trusts. The are considered to be testamentary trusts, which are more commonly used as a tax planning tool or a means to manage assets for certain beneficiaries of a will.
Now that you have the basics of what a living trust is, we’ll move on to the differences between a revocable living trust and an irrevocable living trust.
A revocable living trust is the most common type of living trust. Usually when people talk about a living trust, they mean a revocable living trust. A revocable trust is a document that sets out how your assets will be managed during the course of your lifetime and beyond. It will also address how your assets will be managed in the event that you become incapacitated. The terms of a revocable trust can be changed or dissolved at any time, hence the name “revocable” trust.
An irrevocable trust, as you may have guessed, cannot be changed once it is created. The terms are set and inflexible once the irrevocable trust is signed and only in extremely rare circumstances can changes be made to an irrevocable trust. Many times, upon a revocable trust owners’ death or once a certain provision is met, the trust converts into an irrevocable trust.
The rigidity of an irrevocable trust may make you wonder why people would utilize them in the first place. One key reason is to shield assets from creditors and avoid certain estate taxes. Because a revocable trust is so flexible and the owner has so much control, the assets within the trust are considered to be the owner's personal property and creditors may be able to get at the assets in a revocable trust. Similarly, assets in a revocable trust may be subject to state and federal estate taxes. Thus, an irrevocable trust may be better for people looking for enhanced asset protection.
A benefit of both types of trusts is that they avoid probate, meaning your assets will be distributed to your heirs more quickly and you will save money on court fees. Both types of trusts also offer more privacy than a will, since a will becomes public during the probate process. Another huge benefit includes having a plan of action for your assets and affairs without court intervention in case you ever become incapacity.
Trusts can be complicated to create. Because these documents protect some of your most important assets, you want to make sure that they are done correctly. Rhonda Miller is an experienced Fairfax living trust attorney who can help you create a living trust, revocable or irrevocable, that best benefits you. Contact her today to see how she can help.