What's the Right Trust For Me?

Published on: 20:00PM Dec 02, 2012

We received the following question from a reader:

"Which type of estate trusts do you recommend or prefer, revocable or irrevocable, and why ?"

Since this a blog, it would be impossible to fully answer this question, but I am going to give some of my general feedback on this question.

First, a revocable trust means just that. It can be "revoked" at any time during life and it is usually only at death that it becomes irrevocable. There is no completed gift when assets are placed into this type of trust and generally, these trusts are used to avoid probate especially if you have properties in multiple states.

Second, sometimes I will hear a promotion of a revocable trust being much better than a will since it will save estate taxes. Generally, a properly drawn will will provide the same amount of tax savings as any revocable living trust. The primary savings to the revocable trust is the probate savings.

Third, to achieve lifetime gifts using a trust, you will generally need to use an irrevocable trust. Once the assets are placed into this type of trust, you have made a completed gift and any appreciation on these gifts will be excluded from your estate.

Fourth, in many cases, you may want to use what is known as an intentionally defective grantor trust to make lifetime gifts. The benefit of these trusts is that the assets are excluded from your estate, however, the income generated will continue to be reported by you on your income tax return. This prevents some of the issues associated with kids and grandkids getting schedule k1s showing a large amount income and wondering where there cash is. Also, any taxes paid by you are not considered a gift and thus, will continue to reduce your estate.

Fifth, there are many other types of trusts that would take to long to expound upon. In general, if your primary goal is to avoid probate costs, use a revocable trust. If your primary goal is to make lifetime gifts, you an irrevocable trust.

The use of a trust can be extremely complicated and you must discuss this with your advisor, but with the rapid increase in land prices, now is the time for that discussion.