TRUST ME, You'll Want to Read This Blog About Simple Trusts!

There are terms that you hear casually in the media such as “trust fund baby” or “my parents are going to kick me out of the trust”. What if I told you that a trust doesn’t have to be for people who are rich enough to burn $1 bills? What if I told you that a trust is actually one of the greatest ways to pass down your assets from generation to generation?

Trusts ultimately fall into two basic categories: revocable and irrevocable. Both of these types of trusts have both advantages and disadvantages. It is extremely important that you’re cognizant of the ramifications behind choosing a revocable or irrevocable trust.

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1. Revocable Trust

   1. Pros

      1. Can be easily changed during the life of the trustmaker (hence the term “revocable”).

      2. Trustmaker resolves the right to change/modify the trust at anytime

      3. Elements of privacy with regards to owning real estate and interests in businesses

      4. Taxes are reported on an Individual’s Form 1040 (also requires a Form 1041 to be filed for informational purposes); so it provides some simplicity and doesn’t create another layer of taxes

      5. Does not require the services of an outside Trustee

   2. Cons

      1. Often a lack of protection from creditors

      2. Not always guaranteed to avoid probate if structured incorrectly

      3. No immediate tax benefits since the assets are treated as though they belong to the individuals

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1. Irrevocable Trust

   1. Pros

      1. Allows a trustmaker to move assets out of the trustmaker’s name and control

      2. Asset protection from creditors if “spendthrift clause” is present

      3. Potentially a lower tax burden if high dollar items such as real estate investments are owned in trust

   2. Cons

      1. In theory, an irrevocable trust is irreversible. However, a trustmaker may, in actuality, revoke their irrevocable trust using a method known as “trust decanting”

      2. The structure is NOT nearly as flexible as a revocable trust. If you’re the grantor of an irrevocable trust, once you place the items in the irrevocable trust you’ve lost control.

         1. Which leads to, in my personal opinion, the largest negative surrounding an irrevocable trust: the loss of control

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This basic breakdown does not even begin to discuss the vast amount of trusts utilized by Americans, but irrevocable trusts and revocable trusts are undoubtedly the most common form that we see when a trustmaker is trying to pass down assets to another generation. At Hampleman Law, we’re comfortable with simple and even complex estate planning matters. Please reach out to us for a free, initial consultation today!

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