A well thought out and comprehensive estate plan can accomplish a number of goals that go far beyond just deciding who will receive your estate assets when you are gone. To accomplish all of those goals your estate plan will likely need to include a number of additional estate planning tools and strategies in addition to a basic Last Will and Testament. Trusts are a common addition to a well-rounded estate plan because of the numerous goals that can be reached using a trust and because of the flexible nature of trusts. In order to know which type of trust is best for your estate plan however, you need to learn some trust basics. For example, what are some living trust benefits and why would you want to include one in your estate plan? You should always consult with your North Carolina estate planning attorney before making important decisions about your estate plan; however, learning more about living trust benefits will ultimately help you decide if a living trust is right for your plan.
What Is a Trust?
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor (also referred to as a “Maker” or “Grantor”), who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. The beneficiaries of a trust may be current and/or future. The basic elements required to create any trust, therefore, include:
Although you may not realize it, you likely enter into trust agreements all the time. Imagine, for instance, that you ask your brother to hold onto $100 in cash until your sister is able to get back to town and then give the money to her. In that scenario, you are the Settlor, your brother the Trustee, and your sister is the beneficiary of the trust.
Testamentary vs. Living Trusts
All trusts fall into one of two categories – testamentary or inter vivos, more commonly referred to as “living trusts.” A testamentary trust is a trust that does not activate until the death of the Settlor, usually pursuant to the terms of the Settlor’s Last Will and Testament. A living trust, on the other hand, becomes active as soon as all formalities of creation are met, during the lifetime of the Settlor.
Revocable vs. Irrevocable Living Trusts
Living trusts are then further divided into revocable and irrevocable living trusts. A revocable trust is one that can be modified or changed at any time and for any reason by the Settlor whereas an irrevocable trust cannot be modified or revoked by the Settlor for any reason once the trust takes effect. Testamentary trusts, by their very nature, are all revocable trusts because they do not take effect until the death of the Settlor.
Living Trust Benefits
A living trust can offer a number of different benefits to the Settlor and/or the beneficiaries. Whether you create a revocable or an irrevocable living trust depends on the purpose of the trust. For example, the following are two examples of ways in which a revocable and an irrevocable living trust can benefit your estate plan:
- Incapacity planning — A revocable living trust works as an incapacity planning tool by allowing you to create the trust and appoint yourself as the Trustee of the trust. You then appoint the person you wish to take over control of your assets should you become incapacitated as the successor Trustee. Major assets are then transferred into the trust for you to manage as long as you are able to do so. You also include trust terms that allow the successor Trustee to take over for you in the event of your incapacity, allowing for a relatively quick and simple transition to the successor Trustee if you become incapacitated.
- Asset protection — A living trust is often used as part of an asset protection strategy; however, it must be the right type of living trust. Only an irrevocable living trust can help protect your assets because the key to asset protection is legally removing the assets from your estate. Assets transferred into a revocable living trust may remain accessible to you because of your ability to modify or revoke the trust. Assets transferred into an irrevocable living trust, however, are legally owned by the trust and no longer under your control once transferred. Because the assets are no longer owned by you, they are out of the reach of creditors. You may still be able to benefit from the assets though. A properly drafted assets protection trust can be set up to include you as a beneficiary of the interest earned on the trust assets.
For more information, please download our FREE estate planning worksheet. If you have additional questions about living trust benefits in the State of North Carolina contact the experienced estate planning attorneys at The Law Offices of Cheryl David by calling 336-547-9999 to schedule an appointment.