A trust is a formal legal arrangement you can create for the management and distribution of your property either during your lifetime or upon your death. As the “Settlor”, you transfer ownership of assets to a “Trustee”, who manages the assets and makes distributions to beneficiaries. A Revocable Trust can be changed by you during your lifetime. An Irrevocable Trust generally cannot. If properly drafted, a Trust can avoid the need for Probate.
There are two major categories of trusts: A Revocable Trust, and an Irrevocable Trust.
A Revocable Trust allows you to retain control of your assets during your lifetime. You can alter it or dissolve it at any time during your lifetime. A Living Trust is a form of a Revocable Trust. Revocable Trusts may help you avoid Probate. They are still subject to Estate Taxes.
An Irrevocable Trust transfers assets out of your control. It can generally avoid Estate Taxes and the need for Probate. An Irrevocable Trust, as the name suggests, cannot be altered or dissolved after it is created.
Following are common examples of Trusts that may be part of a comprehensive estate plan:
Testamentary Trust: This Trust is created by the provisions of a Will, and goes into effect after your death. This is generally subject to Probate and to Estate Taxes.
Marital or “A” Trust: This Trust provides benefits to a surviving spouse, and is included in the taxable estate of the surviving spouse.
Bypass or “B” Trust: This Trust is often established along with a Marital Trust at the death of the first spouse. It is created to make full use of of the Federal Estate Tax Exemption for each spouse.
Irrevocable Life Insurance Trust (ILIT): This trust excludes life insurance proceeds from your taxable estate.
Qualified Terminable Interest Property Trust (QTIP): This trust provides income to a surviving spouse until their death, when the assets then go to additional beneficiaries. This can take advantage of the full Estate Tax exemption. It is often used in second marriages with children from a prior marriage.
Charitable Trust: This trust provides certain assets to a charity, with the remainder going to other beneficiaries.
Advantages of Using a Trust
There are significant pros and cons to using a Trust rather than a Will. You should consult with an Estate Planning Attorney to discuss whether a Trust is suitable for you. Following are some general advantages of using a Trust:
- It can avoid Probate. This is the most common reason a Revocable Trust is used. To the extent a Revocable Trust is funded during the person’s lifetime, or provision is made for the transfer of assets following their death, Probate is avoided. This means you avoid court fees, inventory filing, notice, and legal expenses.
- It is more confidential. If the Revocable Trust is fully funded before the settlor’s death, the details of the trust can remain confidential.
- Court supervision is generally not required. In Wisconsin, a trust is not subject to continuing judicial supervision unless specifically ordered by the court.
- It is faster. Without judicial supervision, a Trustee can act quickly if necessary to disburse funds or transfer assets. It is not necessary to wait for approval from a judge.
- It provides for management of property in a different state. If the estate is subject to Probate, and real estate is owned in a different state, it is necessary to open ancillary Probate in that state. However, a Trust can oversee property in other states, if the property was transferred into the Trust during the lifetime of the Settlor.
- There are few income tax implications for a Revocable Trust. Because the creator of a Revocable Trust retains the power to revoke the Trust, they are treated as the owner of the trust assets for income tax purposes. The Trust is disregarded as a taxable entity.
Disadvantages of Using a Trust
- The Trust Must be Properly Funded. The Settlor of a Trust must transfer their assets into the name of the Trust. This requires opening bank accounts or investments in the name of the Trust, and retitling property in the name of the trust. When new assets are acquired, after the Trust is created, care must be taken to ensure the assets are properly titled.
- The Initial Costs of a Revocable Trust are Generally Higher. Properly drafting a Trust generally requires more legal work than the drafting of a will. It generally requires the client to spend more time with the attorney to discuss how the Trust will be funded and how it will operate. Properly creating a Trust requires the drafting of additional documents, such as a Marital Property Agreement and a Pour-Over Will, to ensure the Trust is fully funded.