Why are Trusts So Important to Estate Planning? 

A comprehensive and thoughtful estate plan is crucial. While most Floridians understand that they need to have a valid will in place, many do not realize how beneficial establishing a trust can be for protecting assets and avoiding the burdensome probate process.

What is a Trust?

A trust is a legal document created by a party (the settlor) that is managed by a second party (the trustee) for the benefit of a third party (the beneficiary).  A trust holds assets — like cash, real estate, and investment accounts— and distributes them according to the settlor’s wishes. Essentially, a trust is a legal tool used to protect, grow, and distribute the settlor’s assets.

There are numerous advantages to setting up a trust:

  • Control. A trust allows the creator to specify when and to whom assets are to be distributed. For example, a trust can articulate that your assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass after your death. This can prove advantageous in complex situations such as when children from multiple marriages are involved.
  • Protect your legacy. A well-crafted trust can help protect your estate from creditors or from beneficiaries who may not be skilled at money management.
  • Privacy and Estate Tax Savings. A will, which starts as a private document, becomes public record when it enters probate.   A trust allows assets to pass outside of the probate process and remain private. As an added bonus, keeping assets out of probate court will reduce the amount lost to attorney’s fees, court fees, and potentially taxes in the process.

Do I Need a Will and a Trust?

 A trust and will serve two distinctly different purposes. A will takes effect after your death and includes instructions on distribution of your assets, who should be the guardian of your children, and funeral arrangements. In addition, a will always passes through probate, which means a court will ensure its validity and will supervise the administration.

In contrast, a trust becomes effective while you are still alive. The purpose of a trust is to serve as the holder of your assets with clear instructions on who will receive what and when. In most cases, a trust will not need to go through probate. Depending on the complexity, a trust can save your family a lot of time and money.

While everyone should have a will, not everyone needs a trust. However, both can be beneficial. Choosing the right trust to meet your needs is not always a straightforward endeavor.  Let the experienced staff at Eldredge and Davis explore your estate planning options and provide the guidance needed to ensure that your legacy is protected.   

A trust can either be revocable (amendable/changeable) or irrevocable (not amendable/not changeable), depending on the goals and needs of an individual. Let’s explore the differences and advantages of each.

Irrevocable Trust

As its name implies, an irrevocable trust is a trust that cannot be revoked, altered, or modified by the settlor once it is created. Once the property is placed in the trust it cannot be removed, even if the person who created the trust changes his mind. As a result, the settlor gives up all ownership rights to any of the assets placed in the trust. Since the settlor no longer controls the assets in the irrevocable trust, the assets are not taxed and are protected from any creditor claims, civil judgments, and estate taxes. Consequently, an irrevocable trust offers a layer of asset protection that is not provided by a revocable trust. An irrevocable trust is typically a good choice for wealthy families that can afford to part with significant assets in order to transfer them to their beneficiaries tax-free.    

Revocable Trust

In contrast, a revocable trust can be changed, modified, altered or revoked at any time while the settlor is alive and competent. Revocable trusts, also referred to as living trusts, provide much more flexibility if you want to keep your options open.  Family dynamics change, human nature never ceases to surprise, and relationships ebb and flow.  If your formerly level-headed nephew tells you he is moving to Roswell to devote his life to a UFO cult, for instance, you might want to reconsider leaving him a small fortune with which to pursue his fanciful ends.  Maintaining control of the trust assets is also useful for individuals who think they may need to remove their property from the trust at some point in the future.

Unlike an irrevocable trust, the assets placed into a revocable trust are still considered owned by the settlor and thus subject to income and estate taxes.  Furthermore, the assets will not be protected against creditor claims or civil judgments against the settlor. Like an irrevocable trust, the main reason to establish a revocable trust is to bypass the probate process upon your death. Although the trust assets will still be subject to applicable estate taxes, the assets will be distributed directly to the beneficiaries listed in the trust without needing to go through a lengthy probate case first. 

What Kind of Trust is Right for You?  

Whether irrevocable or revocable, both trusts can hold a variety of assets: cash, real estate, land, stocks, bonds, securities, personal property, etc.  Each type of trust has its advantages, depending on your individual circumstances and goals. When deciding which trust is right for you, consider the following:

  • Is your only purpose to avoid probate?
  • Are you trying to protect a specific asset? A home? Your great grandmother’s jewelry collection?
  • Do the assets generate significant income?
  • Are you concerned with your heirs being hit with a huge tax penalty?
  • Do you own sufficient assets to relinquish a substantial portion of them now for the tax benefit later?
  • Are your heirs financially responsible?   

With these answers in mind, you should have a better understanding of the type of trust that will best fit your needs. There may be times that you need the protection that an irrevocable trust provides or situations where you want to remain more in control.  

Your Flagler County Trust Attorney

The knowledgeable staff at Eldredge and Davis consider each client’s unique situation, plans for the future, and financial goals when advising on estate planning strategies like trusts. Give us a call at (386) 445-2211 for a consultation today.