As we begin our blog by surveying different estate planning concepts, an important stop is the trust. Many concepts in this area of law are quite old, having roots in English common law, and trusts are no different. Trusts grew out of the more ancient concept of enfeoffments to use (or uses) in the sixteenth century largely because people were using uses to very effectively avoid paying taxes. In the hundreds of years since then, trusts have grown to serve a wide variety of functions, including sometimes being a viable tool to reduce one's tax burden.
In broad strokes, a trust is an arrangement between 3 different actors: a settlor or grantor who conveys the property to be held in trust, a trustee to hold title to the property as a fiduciary; and one or more beneficiaries who ultimately receive the property in the trust or the benefits from that property. The trustee, as a fiduciary, is under a duty to make decisions regarding the property that are in the best interests of the beneficiary or beneficiaries. Sometimes the same person can serve as more than one of these roles. The property conveyed to the trust is called the corpus (or principal) of the trust, which is separate from any income the trust might produce from the property. Trusts are used for many different reasons, but we will focus on the trust as a part of a broader estate plan. There are various types of trust, but we will focus two major axes: living trusts vs will trusts, and revocable trusts vs irrevocable trusts.
First, a living trust (or inter vivos trust) is a trust that is created while the settlor is alive. On the other hand, a testamentary trust (sometimes called a will trust) is a trust that is created by a will and comes into existence after the death of the settlor. These have different implications. For example, a living trust can sometimes help avoid probate of certain assets, whereas a will trust is created only after a will has been accepted into probate, and thus cannot. However, a challenge to the validity of a living trust might be just as undesirable as the probate it was meant to avoid, and a will trust allows the settlor to maintain complete ownership of his or her property throughout the settlor's entire lifetime. The type of trust that is used is determined by the specific circumstances of the situation and the particular advantages the settlor seeks to gain from the trust.
Within living trusts, there are two additional categories. A revocable living trust is a trust that can be modified by the settlor after it is made, and oftentimes the same person is the settlor, the trustee, and the beneficiary. This kind of trust can sometimes be used to keep assets out of probate, to increase privacy in the transfer process, and can possibly be used to plan ahead for future disability or incapacitation, although other instruments (such as advance directives, powers of attorney, etc) are often better suited to that task and simpler to prepare. A living trust generally does not shield assets from creditors or offer meaningful protection from estate taxes.
An irrevocable living trust is a trust that the settlor cannot modify after the trust has been created. Additionally, in an irrevocable trust, a trustee generally cannot also be a beneficiary, meaning that the settlor usually surrenders a greater degree of control over the property than under a revocable trust. This type of trust can sometimes be used to ease estate tax burden and shield certain assets from certain types of creditors. This last function is common in Tennessee, which is regarded as having favorable laws relating to asset protection trusts. All will trusts are irrevocable by definition because they are created after the settlor has passed away; the distinction between revocable and irrevocable is only meaningful for living trusts.
Each type of trust described here can be useful under different circumstances, but can be complicated to set up and expensive to maintain. This is why it is important to consult with an attorney about your specific situation and where different types of trust might fit into your estate plan.
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