Demystifying Trusts -- How Trust Planning Can Benefit Your Family

A Series on Trusts – Part II

Inter Vivos Trusts and Trusts Created at Death

In our continued efforts to educate our clients and readers about estate planning, wealth preservation, and asset protection, we bring you the next installment in our Series on Trusts.

In last week’s article, we explored the basic components of a trust and defined some common trust terminology. In this article we will endeavor to dispel some myths and start pulling back the layers of trust planning a bit further to help clarify a complex and often misunderstood topic.   

Many people initially believe that trust planning is only for ultra high-net-worth individuals.  This is a common misconception that is completely untrue.  Trust planning can provide a significant benefit to a whole host of individuals and families spanning wide ranging levels of wealth.  Trusts can be a vital component of a multi-faceted plan designed to accomplish a number of goals, including, but not limited to, asset management, probate avoidance, tax planning, wealth preservation, and/or asset protection from divorce, creditors, and lawsuits.

So how do you know which type of trust would be most beneficial for you and your family?  The first step in this analysis starts with understanding how trusts are categorized. 

The myriad types of trusts can be categorized into three classifications based on:  1) when the trust becomes effective; 2) if, when, and by whom it can be amended, changed, revoked, or terminated; and 3) the purpose for which it has been established. 

This article will focus on the first classification:

When the Trust Becomes Effective

Inter Vivos Trust or Living Trust

We find that many individuals think that trusts come into existence only after the trust creator, known as the “Grantor,” passes away.  While it is true that some trusts are activated only after the Grantor dies, many trusts are created and managed during the Grantor’s lifetime.

“Inter Vivos” is a Latin phrase which means “while alive.”  Trusts that are created during a Grantor’s lifetime are called Inter Vivos or Living Trusts.  Living Trusts can be even further defined as Revocable or Irrevocable (we will discuss this in more detail in next week’s installment of our Series on Trusts).  Both Revocable and Irrevocable Trusts can be written to benefit the Grantor, other beneficiaries, or a combination of both.  

The most common inter vivos trust, which is the Revocable Living Trust, allows a Grantor to access, use, and spend assets that are titled in the name of a living trust while he or she is alive. When the Grantor passes away, the assets that were titled in the name of the inter vivos trust pass directly to the beneficiaries and bypass probate. 

Probate avoidance is one of the primary benefits of a Revocable Living Trust.  Assets correctly titled in the name of the trust will pass through the trust and not under the last will and testament, thereby transferring without the need for oversight by the local probate court.  

Privacy is an additional benefit of Revocable Living Trusts that many clients find appealing.  Wills that are filed for probate become a matter of public record.  A living trust is not as easily accessible in the public domain. However, we must note that a trust document is often still obtainable by way of being attached to the PA Inheritance Tax Return, which does become public record once filed.

Inter vivos trusts are generally governed by the law that is in place at the time that the trust was created, not the law in effect at the time of the Grantor’s passing. 

Creating an inter vivos trust can be incredibly useful in certain circumstances, but it is not a “cookie cutter” solution that works well for everyone.  It is important to always consult with an experienced Pennsylvania Estate Planning attorney to discuss all of the options and determine what approach is best suited to your goals and particular set of circumstances.    

Trusts Created at Death

There are a wide variety of trusts that are established under a Will and come into existence only after the death of the Grantor.  Trusts that are created under a Will are often referred to as Testamentary Trusts. After the Grantor passes, the will must go through probate before a testamentary trust is activated. 

Although trusts that are activated at the death of the Grantor do not avoid probate in Pennsylvania, they come in many different forms and can achieve a plethora of planning goals, including, but not limited to:

  • Preserving assets for children from a prior marriage
  • Providing care for a beneficiary with special needs
  • Reducing potential estate taxes
  • Providing for a spouse’s financial future
  • Protecting assets from divorce, creditors, and lawsuits
  • Gifting to charities

Typically, testamentary trusts are subject to the law that is in effect at time of the Grantor’s death. 

Next week we will be discussing the second classification of trusts having to do with whether the Grantor has retained the right to modify or revoke the trust.  This categorization determines whether a trust is Revocable or Irrevocable

Through careful trust planning, you can create significant asset protection for your spouse, children, and grandchildren and, when appropriate, you can make gifts to selected charitable causes to optimize the value and impact of those gifts. All of that begins with a plan, understanding your current assets, and a consultation with one of our Estate Planning and Elder Law  attorneys to explore all of your best options.

Call us today at 610-933-8069 to schedule an appointment.

David M. Frees, III
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Attorney, Speaker and Author
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