The word Trust is defined as a firm belief in the reliability, truth, ability or strength of someone or something. Common synonyms are confidence, belief, faith, certainty, assurance and reliance. The type of Trust (Living Trust) I am going to be discussing today falls into the something category. There are only two (2) types of Trusts, either revocable or irrevocable.
When the grantor (person forming the trust) creates a revocable trust, that individual typically acts as trustee (overseer) of the assets and/or property they place into the Trust for the Grantee (Person reaping the benefit of the Trust, commonly known as the Beneficiary). All income earned by the trust even though it is received by the Beneficiary is still taxed to the Grantor as they still technically own the assets. The Grantor reserves the right to take assets back out or dissolve (Revoke) the Trust at any time they desire. I know you have probably heard the term “Trust Fund Baby.” So if you are not acting the way the Grantor thinks you should act with a revocable trust, then you can have it taken away. Either Daddy Hilton looks the other way in regards to Paris’ exploits or she has the second type of Trust, an Irrevocable Trust. In a Revocable Trust, since the assets and/or property is still technically owned by the Grantor, the value of their trust assets count toward their personal estate and in determining whether it will owe estate taxes upon their death. Currently in 2017 the Estate and gift tax exemption is $5.49 million per individual, up from $5.45 million in 2016. So if you are lucky enough to have a net worth of $5,490,010, then you would only pay estate taxes on the $10 bucks. The first $5.49 million is exempt.
The second type of Trust is an Irrevocable Trust. It is created the same way with the Grantor placing assets and/or property into the Trust for the Grantee. However, once funded, the Grantor, has no right to them anymore. The Grantor also cannot serve as Trustee. They cannot take the assets back later or dissolve the Trust once formed. They simply fund the Trust and step away. The positive for the Grantor’s estate is the Trust is protected from their creditors during their lifetime and from estate taxes upon their death. The Beneficiary’s creditors also cannot touch or invade the Trust principal of a well drafted Irrevocable Trust. There are many other types of Irrevocable Trusts that serve more than to just protect against lawsuits and creditors, a couple of common ones are (1) a Bypass Trust for the benefit of a surviving spouse and (2) a Special Needs Trust, to protect against disabled beneficiaries losing government benefits.
If you are like myself and are not a Trust Fund Baby and also find yourself overwhelmed by debt and are having difficulty paying your credit cards, medical bills or personal loans, not to mention your mortgage and vehicle loans, please call one of our conveniently located offices at Bond & Botes to set up a private consultation with one of our experienced attorneys.
We will analyze your situation and help you make the best decision possible to help you navigate your financial problems.
Grant McNutt is a Managing Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. He holds a Bachelor of Science from the University of Alabama, and a Juris Doctorate from the Birmingham School of Law. He has been practicing Consumer Bankruptcy Law since 1999. Read his full bio here.