"Trusts: Revocable and Irrevocable"

Trust Topics Included under this Section

A) Trusts: What exactly is a Revocable Living Trust (RLT)?
B) Trusts: What is the difference between Revocable & Irrevocable Trusts?
C) Trusts: What is a Testamentary Trust?
D) Trusts: Explain the difference between a Living Will and Living Trust.
E) Trusts: Why have an RLT if my estate is not subject to estate tax?
F) Trusts: If we set up a trust, won’t we lose control of our estate?
G) Trusts: Advantages and Disadvantages of a Revocable Living Trust.
H) Trusts: The Crummey Trust
I) Trusts: The Irrevocable Life Insurance Trust (ILIT)
J) Trusts: The Bypass or Credit Shelter Trust
K Trusts: The Qualified Terminable Interest Property (QTIP) Trust


A) Trusts: What exactly is a Revocable Living Trust (RLT)?

A “Trust” is a contract between its “Maker” and “Trustee”. Within the contract the “Trust Maker” gives administrative instructions to the trustee specifying how the assets are to be held and distributed during the maker’s healthy ability, disability, and ultimately upon death. With an RLT a person can be (and usually is) both the Maker and Trustee. A Husband and wife will often be joint trust makers, joint trustees and/or successor Trustees.
The term “Revocable” refers to a set of powers listed in the trust agreement specifying the trust maker’s power to amend or revoke the Trust. Upon revocation the trustee is directed to return all trust assets to the trust maker. The Maker also has power to place assets into or remove assets from the Trust, make all investment decisions, and control all payments and distributions from the trust.

B) Trusts: What is the difference between a Revocable and Irrevocable trust?

For Revocable Trusts: The primary difference is the maker’s ability to revoke, change or amend the trust at any time. This flexibility within the Revocable Trust can be designed to control all of the maker’s property, totally avoid estate probate and maximize federal estate tax savings. However, the assets within this trust are included in the trust maker’s gross estate for estate tax purposes.
For Irrevocable Trusts: Without court approval, this trust cannot be altered or amended. These trust types are most often used in conjunction with holding certain, select assets. If the trust maker holds no rights in the irrevocable living trust, is not a trustee or a trust beneficiary, the trust assets can be excluded from the trust maker’s gross estate for estate tax purposes.

C) Trusts: What is a Testamentary Trust?

This is a trust created by a Will and is not in force during the Maker’s lifetime. Assets cannot be placed in this Trust during the Maker’s life. This Last Will-created trust designates a person to serve as trustee, names the trust beneficiaries, and includes directions on how assets are to be administered in the trust. The Testamentary Trust’s key feature is that it does not automatically take effect upon the death of the decedent; rather, only if the Last Will creating the testamentary trust is admitted to probate. Assets must go through the Probate process before being placed in the testamentary trust.

D) Trusts: Explain the difference between a Living Will & Living Trust?

A “Living Will” formalizes written preplanning for very sensitive personal issues like directing your physician to discontinue life-sustaining procedures if a terminal condition or a permanently unconscious state exists. Each state has statutes providing specific guidelines and language for inclusion in living wills.
A “Living Trust” handles financial affairs not health care issues. Refer to the information discussed previously entitled: “What exactly is a Revocable Living Trust?”

E) Trusts: Why have an RLT if my estate is not subject to estate tax?

Because it is an excellent planning tool that can handle many different needs including a need:
1) For disability by appointing someone to administer your assets during disablement in accordance with detailed instructions on care giving for you and your loved ones.
2) For creating a “special needs trust” for a family member that requires special care.
3) To safeguard an estate with a reliable successor trustee who can administer spendthrift provisions to restrain heirs that are poor at handling money or minor children from unwise spending or provide protection from creditor claims.
4) To delay or spread out distributions to heirs until certain ages or maturity levels are reached by designating and instructing a trustworthy trustee.
5) To avoid the public, inefficient and expensive probate process.
6) To handle contentious family members who may fuel legal conflicts among siblings or contest your Last Will or your “final act of stewardship” to God.

These are just a few examples of the needs that can be handled with an RLT. Be sure and remember to never choose a planning tool solely based on your estate size rather base the choice on needs.

F) Trusts: If we set up a Trust, won’t we lose control of our estate?

You should be adequately protected assuming your trust agreement is prepared by a qualified, competent estate planning attorney that has made sure the trust document’s language stays within the boundary of trust, debtor-creditor, marital, bankruptcy and tax law. Futhermore, it is essential the instructions that your trustee must obey are detailed and specific for the trustee to ensure your control measures are carried out. Remember you or your spouse or both can be your own trustee while you are alive and competent. Under this arrangement you continue to make the decisions to buy, sell, charitably contribute and use your assets just as always before the trust was created.

G) Trusts: Advantages and Disadvantages of Revocable Living Trusts (RLT).

Advantages (or benefits) of the RLT includes: Control, Cost, Convenience and Confidentiality.

“Control”: A fully funded RLT allows the trust maker to retain control of their estate planning and regular financial affairs while avoiding probate and its related pitfalls. This control can be maintained even during an extended period of disability through the successor trustee. This person who is designated by the trust maker simply follows the directions specified in the trust and supplemental documents including the living will and durable powers of attorney for health care. Without proper planning, the trust maker’s wishes remain unknown and control is ultimately lost.

“Cost”: Because property held in the RLT avoids probate, the cost of administering the trust estate after the maker’s death is much lower than the professional fees for administering the same estate in the probate process. With an RLT there is no need to retain an attorney to steer the estate through probate. The successor trustee simply takes over and his reasonable trust administration compensation is generally less than 1 percent of the gross estate. Through the probate process the probate administration cost can range from 3 to 10 percent of the gross estate.

“Convenience”: Administering a Trust Estate is much more timely, less cumbersome and less time consuming than administering the probate estate. Upon the disability or death of the trust maker, the successor trustee has legal control of the trust assets immediately, without court involvement and without interruption to the trust maker’s lifetime endeavors.

“Confidentiality”: Trusts are private. Wills and the entire probate process are public. Anyone (friend, foe, intrusive neighbor, or potential suitor for your business) can simply contact the court and receive copies of all papers filed in connection with your probate estate.

Disadvantages (or detriments) of the RLT include: Expense, Funding, Homestead Status.

Expense: Only initially is a trust-centered plan more expensive than a Last Will. Cheaper cost Last Wills produce expensive probate legal fees eventually. In the long run, the RLT route will be less expensive.

Funding: Transferring title into a trust is not a disadvantage but an annoyance for some people. It is less trouble to get things in order while you are alive rather than forcing your heirs to sort it out.

Homestead Status: In some states homeowners may not be entitled to protections from declaration of homestead if they place their homes into an RLT. A home can be titled so that the benefits of homestead status and titling the property into the RLT can both be obtained. Titling the property in joint tenancy with an heir could be a viable alternative in some states.

H) Trusts: The Crummey Trust

The Crummey Trust, also known as “Crummey Powers”, permits making a gift of future interest, while qualifying for the annual $11,000 (recently increased) annual gift exemption. The Crummey Trust was named for the Reverend Crummey, who won a tax case against the IRS in 1968.
When a person makes a gift to another person, in order to qualify for the annual $11,000 gift tax exemption, the gift must be one of “present interest”. A gift of a present interest is one given to the recipient immediately, without restrictions, or it is delayed until the recipient reaches age 21, subject to certain conditions. If the gift is delayed until after age 21, it is a gift of a “future interest” and does not qualify for the $11,000 annual exemption.

I) Trusts: The Irrevocable Life Insurance Trust (ILIT)

There are ownership dilemmas associated with life insurance, which impact whether or not proceeds are included in an estate. Incidents of ownership can include the right to borrow on a policy’s cash value, to change the policy’s beneficiary, to change a settlement option, and the right to change the dividend selection. If the insured were to retain not only outright ownership but also merely incidents of ownership in the policy, the proceeds of the policy would be brought into the estate for estate tax purposes. However, when an ILIT owns a life insurance policy, the death proceeds can be received by the family income tax free, and be excluded from the insured’s taxable estate.

A life insurance trust is typically established as an ILIT funded with cash or securities. The trustee is granted the authority to purchase insurance on the life of the trust grantor. The income generated by the ILIT can be used to pay the premiums on the ILIT’s life insurance policy. Regular contributions can be made to the trust also in order to pay these premiums and be structured in a way that qualifies them for the annual gift tax exclusion.


ILIT assets are excluded from estate tax only when the following conditions are met:

* The ILIT must own the policy and be the beneficiary of the policy
* The insured may not retain any incidents of ownership in the policy
* The ILIT must be irrevocable and be established during the insured’s
lifetime
* The trustee may not be required to use trust assets for the benefit of the
estate

A common area of IRS investigation is the source of funds used to pay the premiums on the life insurance policy in the trust. If the IRS determines that the trust assets are under the control of the insured, the proceeds may be included in the estate, even though the policy is owned by the trust. There is a definite advantage of naming an unrelated party as trustee in this regard.

J) Trusts: The Bypass or Credit Shelter Trust

This trust is often used to ensure that both spouses take advantage of their estate tax exclusion, without directly transferring assets to other heirs until both spouses have died. Assets equal to the estate tax exclusion are placed in trust after the maker’s death. The maker’s spouse may then use the income and certain trust principal, with the remaining assets transferred to remaining heirs after the spouse’s death. With the estate exclusion amount increasing significantly, the assets placed in the trust may be higher than originally intended.

K) Trusts: Qualified Terminable Interest Property (QTIP) Trust

This trust is typically used when a spouse has remarried and wants to financially protect children of a previous marriage. Language in these trusts generally state that assets in excess of those placed in the credit shelter trust are to be placed in the QTIP Trust. Income from the QTIP trust is distributed to the surviving spouse during his/her lifetime. This qualifies for the unlimited marital deduction, so estate taxes will not be paid after the first spouse’s death. After the surviving spouse’s death, the principal is distributed to the first spouse’s heirs (usually his/her children).