In this episode, Tim will compare key features and functions of different types of trusts.
WRVO Producer Mark Lavonier:
This podcast is part of the series Estate Planning Pro Tips, hosted by attorney Tim Crisafulli of Crisafulli Estate Planning and Elder Law PC an estate planning probate and elder law firm serving clients throughout central New York. A former school teacher, Tim explains complex legal subjects in an easy-to-understand way. The commentary focuses on the central aspects of estate planning, such as Wills, trusts, asset protection, long-term care, and probate. And now here's Tim.
Tim Crisafulli:
Like ice cream, trusts come in all sorts of flavors. Because they are not all created alike, and because different types of trusts accomplish different outcomes, an overview of the main types of trusts makes sense. We'll break this down into two parts, timing and type. First, timing – this first categorization arises out of when a trust is formed – during one's lifetime or after one's death. A trust formed while a person is living is called a lifetime trust. Makes sense right? These will sometimes be referred to as a living trust or for a Latin flair, an inter vivos trust. But it all means the same thing, that the trust was formed while its creator was still living. Contrast this with a testamentary trust. A testamentary trust is made up of a few extra paragraphs or pages embedded in a person's last Will and Testament. The testamentary trust technically does not exist when the Will is drafted and executed. Rather, the testamentary trust just lies dormant. When the person who created the Will dies and after the Will is admitted to probate, only then does the testamentary trust spring into existence. A last Will and Testament is not the only vehicle to create a trust that springs into existence upon the happening of an event. A lifetime trust can also include provisions whereby one or more sub-trusts spring into existence when the creator of the lifetime trust dies. That's it for timing. Now onto type. The second of two categorizations of trusts is revocable and irrevocable. A revocable trust is just as it sounds. The person who creates it can revoke it or cancel it at any time. When I'm meeting with clients, I describe a revocable trust like a big open box. The person who created it can put stuff in it and take stuff out of it any time. A revocable trust is typically used to avoid probate, that is, if a person wants to transfer assets to beneficiaries without them passing through the year-long probate process, then a revocable trust is a tool that can accomplish this. Let's now turn to irrevocable trust. That word irrevocable, it sounds ironclad, bulletproof, unchanging and unchangeable. It's not. Sometimes that's easy and sometimes it requires court involvement. But there is almost always a way to make changes to an irrevocable trust. In fact, New York law even has a procedure to revoke or cancel an irrevocable trust. Uses for irrevocable trusts abound and this gives rise to confusion. One use is for estate tax reduction, but estate taxes these days apply only to high-net-worth individuals. As New Yorkers, we're talking about people with close to $7 million. More commonly irrevocable trusts are used for asset protection. Specifically, if an individual wishes to protect against potential lawsuits or nursing home costs, an irrevocable trust can do that, all the while retaining for its creator the flexibility to make significant changes and retain significant control. If there's already a trust in your life, it's important to know exactly why it was formed, the amount of flexibility that exists and how best to administer it. After all, you must follow the rules set out in the trust and under the law for the trust to retain its protected properties. If your estate planning goals include probate avoidance, tax reduction, protecting assets from lawsuits, or protecting assets from the cost of long-term care, it's worthwhile to look into whether a trust might be right for you.
