Understanding the Essentials, Eliminating the Fear and Ending the Confusion: Revocable vs. Irrevocable Trusts and Your Path to The Right Trust & Informed Trustee Decisions.

Bonus 1:  Discover what the trustee(s) need(s) to know to avoid danger/tax liabilities, and to optimize the value and purposes of the trust.

Bonus 2: For a bit more information on the types of irrevocable trusts used to shelter assets from federal estate tax, or to protect them from long term care costs, see Exhibit 1 below.

And now onto the topic…

As a trust lawyer with over thirty years of experience, I've navigated the complexities of estate planning with thousands of amazing clients. The journey of selecting the right type of trust for the right job—under will, revocable or irrevocable—and to select the trustee or trustees who will carry out its terms is fraught with decisions that can have lasting implications for your own and your family's financial and emotional well-being.

While this short article can’t possibly cover all that you need to know, it can provide you with the essentials.  And, at the end you’ll learn how to register for our first ever trust and trustee educational event.

trust planningThe Foundation: Revocable vs. Irrevocable Trusts

Understanding the fundamental differences between these trusts is a crucial first step.

A revocable trust offers flexibility, allowing the trust creator (grantor) to alter or dissolve the trust during their lifetime. This adaptability is its strength, providing the grantor with control over assets and the ability to respond to changes in life circumstances or goals.

Note however, that this type of trust generally offers no estate tax savings OR creditor protection.  That’s generally a myth.

Conversely, the terms of an irrevocable trust are generally fixed upon creation. As the name implies, you can’t personally amend or change the trust after it’s created.  There may be ways to make it adaptable to change.

The grantor relinquishes control over the assets and the trust’s terms, which generally cannot be changed without the beneficiaries' consent, through court intervention, or by a trust protector (more on that role at the live event). This loss of control is balanced by significant benefits, including protection from creditors and estate tax advantages, making it a powerful tool for wealth growth and preservation.

The Trustee’s Role and Responsibilities

The trustee's role extends beyond merely following the trust document's instructions.

For revocable trusts, trustees often step into a more active role upon the grantor's incapacity or death, managing and distributing assets according to the trust's terms.

They will need to secure the assets, get them valued, file inheritance tax and possibly federal estate tax returns, insure them, and diversify the investments depending on the needs of the beneficiaries and the trusts terms.

Typically, annual income tax returns are then also due for filing.

Failure to perform these duties (under a fiduciary duty) can subject the trustee to personal liability.

In short, making sure that the trust is well drafted, the appropriate trustees are selected and empowered by the document is essential to success.

In contrast, trustees of irrevocable trusts are engaged from the outset, managing the trust's assets, navigating complex tax laws, and ensuring the trust's objectives are met, often without the grantor's ongoing input.

The trustees of irrevocable trusts also operate under a fiduciary duty to the beneficiary or beneficiaries of the trust and can require both extensive training and help to fulfill their duties.

For more on the many types of irrevocable trusts, and why they are used see Exhibit 1 below.

The training that we are offering below (and on the insert to this newsletter) is one of the first steps in making sure that you select the right type of trust, the best trustee(s), and to train them to understand their duties.

Challenges and Risks

Both trustees and grantors face numerous legal, tax, and practical challenges.

Grantors must carefully consider the choice between trust types, balancing control against protection and tax implications. They need to understand their options and to get guidance in making the selection of trust types.

Trustees must be ready to navigate legal obligations, potential conflicts among beneficiaries, and the intricate tasks of trust administration. Errors or missteps can lead to financial loss, litigation, and strained family relationships.

With so many issues both for you as the person working with your lawyers to create the trust, AND for your trustee in administering the trust (either now or in the future) it’s easy to get confused.

We created two great programs that we’re running back to back this summer.  And, in a few short hours you can learn which types of trust are right AND what the trustee(s) need to understand to both optimize the trust AND to avoid dangers and personal liability.

The Seminar: Empowering Trust Choices and Trustee Success With 1) Revocable Lifetime Trusts and 2) Irrevocable Trusts for Tax and Long Term Care Planning

Recognizing these challenges, we've designed a seminar to demystify these complex issues.

In just three hours this summer, you can learn everything needed to make informed decisions about the right trust for your family, select the appropriate trustee, and understand the critical duties that come with this role. Trustees will gain insights into optimizing trust performance, avoiding tax pitfalls, and fulfilling their legal responsibilities effectively.

Why Attend?

- Clarity: After attending, you’ll understand the distinct advantages and limitations of revocable and irrevocable trusts.

- Confidence: At the seminar you’ll equip yourself with the knowledge to choose the right trust type for your estate planning goals.

- Trustee Selection and Improved Capability: You can bring a child or other person who might act as a trustee so that they learn the essential duties of a trustee and how to execute them with competence, avoiding common legal, tax, and financial pitfalls.

Your Next Step

The decisions you make today regarding your trust and choice of trustee have the power to protect your legacy and ensure your family's future prosperity.

I invite you to join us at our upcoming seminar.

There will be limited spaces to ensure that everyone gets the information that they need and gets their questions answered!

To save your spot, please call 610-933-8069.

In just a short time, you can gain the insights and tools needed to navigate the complexities of trusts with confidence. Register now to secure your place and take the first step towards informed, empowered trust planning and administration.


Exhibit 1

Estate Tax Planning Trust Strategies For Large Estates AND For Those Worried About The High Cost Of Long Term Care

1. Irrevocable Life Insurance Trust (ILIT)

   - Use: To hold life insurance policies outside of the federally taxable estate.

   - Why: Proceeds from life insurance owned by the grantor at death are includible in the estate. An ILIT prevents this inclusion and can reduce the taxes substantially while creating the liquidity to pay them

   - Example: Purchasing a life insurance policy within an ILIT, the death benefits of which are not counted within the estate, providing tax-free funds for beneficiaries.

2. Grantor Retained Annuity Trust (GRAT)

   - Use: To transfer asset appreciation to beneficiaries tax-free.

   - Why: Allows the grantor to receive a fixed annuity for a term, with remaining assets passing to beneficiaries, often with little to no gift tax.

   - Example: Transferring appreciating stock into a GRAT, receiving an annuity for 10 years, after which the appreciated stock passes to the children outside of the estate.

3. Family Limited Partnership (FLP) or LLCs Held Within Trusts

   - Use: To transfer business interests or real estate to family members at reduced tax rates.

   - Why: Allows for estate reduction and asset protection, with potential discounts for lack of marketability and minority interests. These trusts can also provide creditor and divorce protection not otherwise available to individuals.

   - Example: Parents transferring real estate or minority interests in a family owned business into an FLP, gifting limited partnership interests to their children at a discounted value.

4. Dynasty Trusts

   - Use: To extend estate tax benefits across multiple generations.

   - Why: Protects assets from estate taxes for as long as state law allows, potentially indefinitely.

   - Example: Establishing a trust that benefits children, grandchildren, and subsequent generations, with trust assets not subject to estate taxes at each generation's passing.

5. Qualified Personal Residence Trust (QPRT)

   - Use: To remove a personal residence from the estate at a reduced tax cost.

   - Why: Freezes the value of the residence for gift tax purposes at the time of transfer.

   - Example: Transferring a home to a QPRT, retaining the right to live in it for a term of years, after which it passes to heirs at a reduced gift tax value.

6. Intentionally Defective Grantor Trust (IDGT)

   - Use: To freeze the value of transferred assets for estate tax purposes while selling assets to the trust without capital gains tax.

   - Why: The grantor pays income taxes on trust income, allowing the assets within the trust to grow tax-free for the benefit of the beneficiaries.

   - Example: Selling appreciating assets to the IDGT in return for a promissory note, effectively transferring wealth without using the gift tax exemption.

7. Elder Law Medicaid Trusts

- Use: To protect assets from being spent down for the high costs of long term care (whether used alone or in conjunction with long term care coverage.

- Why: These trusts can be used to protect investments, and homes from a forced sale and use before you qualify for Medicaid.

These strategies, while powerful, require careful planning and legal advice to implement correctly, considering the complexities of tax laws and potential changes in legislation.

David M. Frees, III
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Attorney, Speaker and Author
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