By Helen Hartman, CRPC®

Estate planning is an important limb of overall financial planning. Trusts, as defined in the article “what is a trust”, offer a variety of options for clients to control distribution and ownership of assets. As clients determine their plan, it is helpful to know about options of formulation.

A Trust entity can be created at two different times:

  1. Living trust- A living trust is a trust that the entity begins while the grantor is still living. This type of trust is also known as inter vivos trust. When a living trust is written, the grantor is faced with the decision to make the trust irrevocable or revocable.
  2. Testamentary trust- The testamentary trust is a trust where the entity begins according to the will of the grantor. Upon death of the grantor, the will triggers the establishment of the Trust entity.

The question of irrevocable or revocable is yet another decision to be had. Let’s look at the difference:

  1. Irrevocable trust- An irrevocable trust is written by the grantor to give assets or income streams to the beneficiary. Once the grantor creates this type of trust, it cannot be changed or terminated without the permission of the beneficiary. This type of trust is frequently created for tax benefit or to provide a vehicle to manage assets of a grantor believed cannot or should not be managing their own property.

A charitable remainder trust is a type of irrevocable trust which pays income to one or more specified individuals until the grantors’ death at which time the balance of named assets pass tax-free to a designated charity (ies). The reverse of this process is a charitable lead trust where the name charity(ies) receives income from assets during the grantors’ life and the remainder passes to designated individuals upon death of the grantor.

  1. Revocable trust- A revocable trust is a trust indenture whereby income producing property is deeded to heirs. The provisions of a revocable trust can be altered as many times as the grantor wishes. This type of trust is probate avoidant as the grantor receives income from the assets during life but the property passes directly to the beneficiary at death of the grantor. **Estate taxes are paid on the transfer of assets from a revocable trust.
  2. Revisionary trust- A revisionary trust is a trust that is composed as an irrevocable trust but becomes a revocable trust after a specified period of time. The defined period of time before reversal is usually over ten years or after death of the grantor.

The subject of trust is very involved and needs effective guidance from legal counsel. The choices can have long-lasting effects on taxation, ownership, and benefits of assets. It is important to know all options and understand what they are before constructing a trust document.