Big Picture, Financial Planning, Millennials

Estate Planning Series Part 2: Intro To Trusts

This is part 2 (of 5) of a series I am writing on estate planning. If you did not read week 1 “Intro to Estate Planning” head on over to that post first so the foundation can be laid for you.

This series will take you from the basics all the way up to the advanced strategies that High Net Worth individuals consider and use.

Anyways, as we move on from the basics, the best topic to go to next is ‘trusts’.

When most people hear the word ‘trust’ they just think of trust fund babies or people with a ton of wealth. But… trusts are not just for the uber wealthy. I will explain why in this blog post.

What Is A Trust?

A trust is simply a legal document that has its’ own rights similar to a person or corporation. With a trust, the trustor (also referred to as grantor) gives the trustee the right to manage it for the benefit of the beneficiaries. In simple terms, if I were to set up a trust, I would be the trustor. I would then pick someone to oversee it (the trustee) for the benefit of my family (the beneficiaries). Getting the terms right here is half the battle for most.

Trusts are oftentimes used to provide legal protection for the trustor’s assets.


By ensuring their assets go exactly where they want them to. They also have a bunch of other benefits:

  • Can potentially help you stay safe from creditors with certain types of trusts
  • Can potentially help you avoid probate, save time and save on legal fees
  • Some types can even help you save on estate taxes when used correctly

I like to think of trusts as a legal document that helps ensure what you want to happen, does happen. It’s really that simple when you break it down but things can also get complex fast.

Types Of Trusts

Every trust falls into 1 of 6 categories:

  • Living or Testamentary
  • Funded or Unfunded
  • Revocable or Irrevocable

Let’s walk through each now so you can understand what all these terms mean.

Living vs Testamentary

A living trust is established while you are alive. It holds the ownership rights or title of the assets you put in it and once you die, your trustee will distribute them according to the living trust. With a living trust, you can retain control over the assets in the trust even after the ownership is transferred there. One of the great benefits of living trusts is that they help you avoid probate.

A testamentary trust (will trust) specifies what will happen to someone’s assets when they die. These are often used for families with young children. Testamentary trusts work in tandem with your will. The main difference between testamentary and living is that living trusts are established when created versus a testamentary trust isn’t until the grantor passes away. Something you need to know about testamentary trust’s is that they do not help you avoid probate. Lastly, they also are considered irrevocable which we will talk about later in this post.

Advantages of Living Trusts

  • Help you avoid probate
  • More privacy
  • Save on legal and court fees

Advantages of Testamentary Trusts

  • Can dictate how assets will be distributed for kids so they don’t get it too young
  • Can get specific with how money is distributed, at what age, can increase the dollar amount overtime, etc.

Funded or Unfunded

This one is a bit self explanatory but I still wanted to get into it.

When you see the word ‘Funded‘ associated with trusts, that simply means that assets have been put into the trust during the grantor’s lifetime.

Unfunded means the trust only consists of the agreement but nothing is put in there while the grantor is alive. They can become funded once the trustor dies or they can remain unfunded. Ensuring they get funded is crucial. I bring this up because we often see people create trusts but then never fund them. If you are spending the money and time to make them, you need to get them funded so they can be utilized! Don’t let your trust go to waste.

Revocable vs Irrevocable

This is the topic that gets talked about the most. It is crucial you know the difference between the two.

A Revocable trusts simply means that is can be changed or updated at anytime as long as you are alive and well. You may hear them called Revocable Living Trusts. They are great for people who want to maintain control of their estate while they are alive. Then once you die, the trust becomes Irrevocable.

Irrevocable Trusts are the exact opposite, meaning that they cannot be changed once they are put in force (in a few situations you can). This means you lack the flexibility, but they come with some great benefits that make it worth it.

Benefits Of Revocable Trusts

  • Avoids probate
  • You remain in control and can make any changes you see necessary
  • Tons of flexibility – even easier to amend than a will
  • Assets and property are still available to you if you become incapacitated. There is a POA in place.

Disadvantages of Revocable Trusts

  • No tax advantages (which is the main reason people consider Irrevocable)
  • Does not protect your assets from creditors
  • Moving assets to the trust can be a process in itself
  • You have to manually update them as things change vs a will can be set to automatically update

Benefits of an Irrevocable Trust

  • Estate tax benefits – This is one of the main reasons they are considered. When you put assets into an irrevocable trust, they are moved out of your name and thus do not add to the value of your estate. They do count for gift tax purposes, but the benefit typically is that they lock in that dollar amount and the growth does not count towards the exemption limit. Let me explain this further. Let’s say a parent wants to give $2mil, they could move that to an Irrevocable trust, not be taxed on it since they can have up to the exemption amount ($12.92 mil or double if married), and then the value grow over their lifetime, but it still only counts as $2mil towards the exemption. There are tons of types of irrevocable trusts that can be useful.
  • They actually provide asset protection from creditors. Great for people who can be subject to lawsuits.

Disadvantages of Irrevocable Trusts

  • Have to file an additional tax return
  • Taxes are high (scale faster than anywhere else)
  • Can be complex
  • Can not often be changed if some life event happens and you need to make a change

Determining which is right for you is HARD. This is why you need to work with an estate planning attorney and your financial advisor to come up with the best strategy for you.

Thanks for reading! Tune back in next week to learn about some of the advanced estate planning strategies higher net worth individuals are utilizing!

Disclaimer: None of this should be seen as advice. It is all for informational purposes. Consult your financial planner, attorney, etc. before making any moves.