Trusts fall into two main categories: revocable trusts and irrevocable trusts. Each has its own purpose suitable to a particular situation.
The concept of the revocable trust (sometimes referred to as a “revocable living trust,” “inter vivos trust”, “living trust,” or “grantor trust”) is similar to a Will in that it directs the distribution of assets at the time of your death, but it does so without the involvement of the often costly, lengthy and public court-supervised probate process. In addition, a revocable trust may provide for your care and the management of your assets during your lifetime in the event of disability or incapacity. When you create the trust and transfer assets into the trust you are known as the Trustor (or sometimes “Grantor” or “Settlor”). You name a trustee, frequently yourself, and the trustee is the person who holds and manages the trust assets in accordance with the terms and provisions set forth in the Trust instrument. The Beneficiary is a person(s) for whose benefit the trust was created. It is created and operational while you are alive and it can be revoked or changed at any time by the person(s) who created the trust.
A trust is irrevocable if the person setting up a trust cannot change his or her mind and recoup property or alter the terms in the legal document. The person setting up the trust cannot be the sole trustee of an irrevocable trust. It can be inter vivos (set up during the grantor’s life) or testamentary (come into effect under the terms of a grantor’s will).
The trust must file an annual federal income tax return, Form 1041, listing income and expenses and showing income paid to the trust beneficiary on Schedule K-1 of Form 1041. The trust is taxed on income retained by the trust; the beneficiary reports the income received from the trust on his or her personal return.
Some Important Uses for Irrevocable Trusts
Irrevocable trusts have many important uses, such as tax savings and asset protection. Here are some of them:
Charitable remainder trusts. The grantor continues to enjoy income during his or her life (or for a term of years), with the property then passing to a charity.
Life insurance trusts. They buy and own life insurance on the grantor’s death, keeping proceeds out of the grantor’s estate (and saving estate taxes).
Generation-skipping transfer trusts. Also called dynasty trusts, they are used to transfer property from a grandparent to grandchild (skipping the child’s generation) in order to save estate taxes.
Minor’s trusts. These are created to manage property for the benefit of a child. Usually property is distributed once the child reaches an age specified in the trust.
Spendthrift trusts. Where there is concern that the beneficiary may be unable to handle money wisely, a trust can be used to manage the property and disburse funds to the beneficiary, who is not permitted to give away any interest in the trust.
Medicaid trusts. These are trusts created so that property is preserved for the family of an elderly person who needs Medicaid to pay for long-term care. The trusts must be established more than five years before applying for Medicaid in order to achieve the intended results.
Supplemental needs trusts. If a beneficiary with a disability is receiving government benefits, these trusts (also called special needs trusts) can be used to provide the “extras” (e.g., birthday parties) without causing the loss of government benefits.
From our offices in Henderson, we provide comprehensive estate planning services for individuals and families in Clark County and communities throughout Southern Nevada. Call us at 702-909-2462 or contact us by email to arrange an initial consultation.