Understanding Revocable, Irrevocable and Charitable Trusts

Estate planning is often an overlooked aspect of financial wellness, but it is one of the most important components. Due to the complexity of the topic, many people do not have a current estate plan to fit their financial planning needs. Having a trust is a vital part of any good estate plan, and below we dive into what a trust is and the different types.

What is a Trust?

Trusts are created with many different terms and to serve various purposes. In general, trusts are created to carry-on a person’s wishes during their lifetime or upon their death, dependent upon the terms of the trust. By using a trust, an organized process is created to manage and distribute assets to beneficiaries. Below is a brief overview of various types of trusts that can be incorporated into an estate plan.

Revocable vs. Irrevocable Trusts

The primary difference between revocable and irrevocable trusts are the treatment of assets and trustee power.

Revocable Trust

In a revocable trust, the assets are considered personal assets and trust terms can be changed at any time by the grantor. Revocable trusts are often called living trusts, as the individual can act as the trustee of a revocable trust. These trusts are taxed on the individual’s tax return and a separate return is not required. Revocable trusts are recommended for most people, even if there will be no taxable estate at death. Upon death, these convert to irrevocable trusts, and assets held in the revocable trust will avoid probate.

Irrevocable Trust

Once assets are placed in an irrevocable trust, the property cannot be taken back, and you cannot act as trustee to manage the assets. These trusts often have high taxes due to the compressed tax brackets if income is not distributed. Assets in an irrevocable trust are held outside of an estate upon death and these assets will not go through probate. Irrevocable trusts can be set up for various reasons during life including removing assets from an estate, asset protection, charitable planning or planning for a special needs individual.

Charitable Trusts

If you are interested in charitable giving, the use of a charitable remainder trust may be the right choice for your financial plan. Assets are donated to the trust and income is distributed to beneficiaries, producing tax savings at the individual level.

Charitable remainder trusts are an example of a split-interest trust. The trust is a tax-exempt irrevocable trust. Income is distributed to individuals for a period of time; upon expiration of the defined period, the remainder of the trust is transferred to the charitable beneficiaries.

It’s important to work with a trusted advisor on developing your estate plan. The Anders Family Wealth and Estate Planning Services Group can help ensure you and your family are preparing for the future. Contact an Anders advisor to learn more.