Iowa Estate Planning – Trusts

Different Types of Trusts – Similar Goals
A trust instrument is basically a descriptive written plan which delays and controls the ultimate distribution and management of your assets.  After your death or incapacity, the person you designate as a trustee will carry out your written intentions.  If the beneficiaries of a plan need assistance with financial matters, due to either age issues, creditor issues, marital concerns or spendthrift risk, a trust is a mechanism that addresses that risk in order to preserve and protect the assets for the beneficiary, without placing the assets at risk.  There are many different types of trusts available, each with their own specific benefits but all with the same goal – provide future management of your assets.

Testamentary Trust
A “testamentary trust” is a trust that is established under the Last Will of an individual.  In other words, the Will includes a section which provides that under certain events, a trustee may be appointed for a trust and whatever assets that are distributed to that trust out of the estate will be managed by the trustee, according to the trust terms outlined in the will.  This type of trust does not avoid probate, and it may not be established after your death, depending on the circumstances.

Revocable Trust
A revocable trust, sometimes called a “living trust” or “inter vivos trust”, is a trust that is actually created during your life and your assets are transferred to the trust as well.  During your life, as long as you are able, you can serve as the trustee of the trust and you have full control over the trust assets to do as you wish.  You can change the trust at any time or cancel it altogether.  It provides who will replace you as trustee if you are incapacitated and then how that successor trustee will handle the trust assets during your incapacity.  At your death, the trust serves as a form of a substitute for a will in that controls the distribution of your assets.  One of the key advantages of a revocable trust when compared to a will is that a trust enables the avoidance of probate at your death.  As a result of avoiding probate, you maintain confidentiality of your assets and distribution plan and potentially will realize savings in attorney fees and court costs.  In order for a revocable trust to accomplish these benefits, it is critical that your assets be transferred to your revocable trust during your life.  If you fail to transfer those assets before your death, it is possible that you will be forced to go through probate for ALL of your assets, not just the ones left out of the trust.  As a result, you lose one of the key advantages of a revocable trust.  However, there are certain assets which you may not want to transfer to a trust due to some income tax considerations.  Consultation with an experienced attorney will help make the determination of which assets should be transferred and how that can be accomplished.  There is common misperception that revocable trusts provide you with tax savings and asset protection.  The revocable trust does not provide any special opportunity for tax savings that can be accomplished by other types of planning.  The revocable trust does not provide you with any asset protection, although it is possible it can provide some asset protection for your spendthrift beneficiaries.

Irrevocable Trust

An irrevocable trust is a type of trust that once it is created, you can’t change it.  As with other types of trusts, it provides how the trust assets will be managed in the future and how they will be distributed.  One of the key advantages of this type of trust is that it provides the opportunity for estate tax savings as well as asset protection.  The disadvantage is that in order to gain these advantages, you lose the ability to have any control over the trust or the assets after transferring those assets to the trust.  A common type of asset that is transferred to this type of trust is a life insurance policy.  Commonly called an ILIT (irrevocable life insurance trust), an ILIT provides the opportunity to have life insurance excluded out of your taxable estate.  A benefit of using life insurance is that it is commonly not an asset that you would need access to during your life and by simply not paying the premium, you can negate the policy if you don’t need or want to provide for a trust beneficiary.  An ILIT is an advanced planning option and should not be attempted without the services of an experienced attorney.