Trusts and Estate Planning

What is a trust?

A trust is a legal arrangement that allows a third-party (known as a trustee) to manage assets on behalf of a beneficiary or beneficiaries. A trust is set-up by a person known as the grantor, sometimes also referred to as a trustor, who determines what assets are to be added to the trust and names the trustee and beneficiaries. Property put in trust is legally owned by the trust and can be any type of asset, including cash, securities, life insurance policies, or a home or other real estate.

What is the purpose of a trust?

There are several reasons trusts are useful estate planning tools. Assets placed in trust avoid going through the probate process upon the death of the grantor. This means that the assets are passed directly to the beneficiary more quickly and without scrutiny. A trust is also very useful in that it enables the grantor to dictate how the assets are distributed both before and after death and in the event of incapacitation, providing peace of mind and discretion. This can be especially helpful if the trust is holding assets for a minor child. Trusts can also protect and/or remove assets from the grantor’s estate entirely, reducing their estate tax liability and possibly income taxes during their lifetime.

Revocable vs. Irrevocable Trusts

Trusts can be created with varying features, each suitable for different situations and the goals of the grantor. One of the first and most important decisions you will need to make is whether the trust is to be revocable or irrevocable. A revocable trust, also called a living trust, allows the trust to be altered after it has been established while the grantor is still living. For example, the grantor can choose to change, add, or remove beneficiaries or adjust how the assets are managed or distributed from the trust. The grantor could even choose to later terminate the revocable trust. In exchange for retaining significant control over the trust and/or continuing to benefit from the trust assets, any income generated in the trust is taxed to the grantor and the trust property will be includible in the grantor’s gross estate at death and possibly subject to estate taxes.

Comparatively, an irrevocable trust cannot be modified once it is established. The beneficiaries, assets, and instructions provided by the grantor cannot be changed and the trust cannot be revoked or terminated. Because the grantor no longer retains any control over the assets within the trust, the trust is a tax entity separate from the grantor and thus liable for taxes on the trust assets. This is an important distinction because the tax brackets imposed on trusts are much more compressed than those that individual taxpayers are subject to. In 2023, a trust that generates $14,451 in interest has reached the maximum tax rate of 37%. These taxes are paid for by the trust. Property held in an irrevocable trust is also protected from creditors and legal judgements and is not subject to estate taxes upon the grantor’s death.

A few other things to note:

• Upon the grantor’s death, a revocable trust will automatically become an irrevocable trust.’
• A grantor can be the trustee of a revocable trust but not of an irrevocable trust.
• A trustee can be an individual or a corporate entity, such as a trust company.
• While trusts can be more costly to create and maintain than a will, they can provide privacy,assurance, asset protection, tax advantages, and will expedite the process of passing assets to beneficiaries upon death.

If you feel a trust may be suitable for your needs, your Vision Capital Client Relationship Manager is ready to discuss your options with you and answer any questions you may have.