Should a trust be part of your financial planning?

Trust Basics for Retirees

by Paige Estigarribia


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As you begin exploring ideas for saved income, retirement, and estate planning, you may be wondering about trusts as an option. But what exactly is a trust? And how does it work with family members, retirement income, etc.? If you've been pondering questions like these, we interviewed Renee Linares Chin, Esq., an Estate Planning Lawyer (ReneeLinaresChin.com) who is keen on finances too. She gave us some great information on trust basics for retirees looking for options in their own estate planning. Here's her thoughts:

Q: Why would a retiree want to set up a trust?

Renee: Most retirees would benefit from having a trust set up which funds their medical expenses, provides retirement income, and funds funeral expenses in the future. In this instance, the retiree would be considered the beneficiary of a living trust as discussed below.

Q: What is the difference between a revocable and an irrevocable trust?

Renee: A revocable trust is also called a revocable living trust, a living trust or an inter vivos trust. A revocable trust is a type of trust that can be changed anytime during the trustor's lifetime. (A person who creates the trust is called a "trustor.")

An irrevocable trust is also called a testamentary trust, a type of trust that can't be changed after the agreement is signed, or becomes irrevocable after the trustor dies or after a specific time as stated in the trust.

The largest difference between a revocable trust and an irrevocable trust is the flexibility to modify the terms. You can change a revocable trust as much as you'd like during your lifetime. However, an irrevocable trust cannot be modified except under specific circumstances.

Another difference between a revocable trust and an irrevocable trust is that the irrevocable trust functions to protect the trustor's property from creditors. In an irrevocable trust, the property no longer belongs to the trustor; it now belongs to the trust. Therefore, if the trustor incurs personal liability and is subject to creditor claims and judgments, the funds in the trust are protected as they are not his or her personal property. In contrast, all the property included in a revocable trust is considered the personal property of the trustor. Since the trustor's assets are still considered personal property, they are subject to creditor claims and lawsuits.

You will have to pay estate taxes on revocable trusts because no taxes are paid when the property is transferred into the trust. In contrast, you do not need to pay estate taxes for irrevocable trusts because income taxes are paid when the property is transferred into the trust.

Both revocable and irrevocable trusts function differently to avoid probate court. Probate is a legal proceeding where the court determines the validity of a will and administers the estate of the deceased person. It's advisable to have a trust for the purpose of avoiding probate as the process is expensive, lengthy, and will diminish estate assets. If a person transfers all of their assets into a revocable trust, they own no assets at the time of death and there is no need for probate.

Q: What are some examples of some different kinds of trusts and their purposes?

Renee: An Inter Vivos Guardianship Trust is created by parents for the purpose of providing financially for their children, in the event that both parents die. This trust typically contains provisions stating that the use of trust funds are to be used for housing, health, welfare, and education of the children.

An Inter Vivos Conservatorship Trust is created for the purpose of providing care for a person that becomes incapacitated. This trust typically has a third party trustee. A trustee is a third party who is responsible for managing assets, expenditures, insurance, and government aid (if applicable).

An Inter Vivos Spendthrift Trust is created for the purpose of preventing a beneficiary who is not responsible with money from spending all of the estate assets. This gives an independent third party trustee the authority to make decisions on how to spend the trust funds. The Trustee's authority is limited by guidelines for spending trust assets, which are outlined in the trust document.

An Inter Vivos Charitable Trust is created with the purpose of supporting a charity over a specified period of time. There are no estate taxes to be paid. This type of trust is commonly used to provide income to schools, churches, and non-profit organizations.

A Testamentary Trust is created by a will after the trustor dies. A Testamentary Trust can be created for a variety of purposes. The most common purposes of these are to avoid probate,provide income to the surviving spouse, and protect estate assets for children.

An Irrevocable Life Insurance Trust is funded with a life insurance policy, which should be taken out three years prior to the death of the trustor. The purpose is to reduce estate taxes for wealthy individuals who would be subject to higher estate taxes.

Q: Are there any tax consequences regarding putting money in a trust or receiving money as a beneficiary?

Renee: Yes. You will have to pay income taxes on money earned by assets placed in the trust and on money received as a beneficiary. Depending on the type of trust you have elected, estate taxes may be reduced. The tax liability varies greatly depending on the amount of assets and the type of trust.

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Q: What are some basic things a retiree might plan for if they are considering setting up a trust?

Renee: If you are considering setting up a trust, you need to get a comprehensive list of your assets and liabilities along with listing people who have access to your assets. Knowing your portfolio of assets should help you put together an estate plan regardless if a trust is part of that plan. Any attorney or financial advisor will be better able to assist you if you have comprehensive records of the following: trust deeds to all real property owned along with ownership records for cars, boats and planes; list of valuable personal property items such as furs, jewelry, sports equipment and electronics; list of all bank accounts, CDs, 401K, Roth IRA, retirement savings accounts and safe deposit boxes where valuables are stored and the names of individuals who have access to these assets. Additionally, if you have minor children, you and your partner should have a list of guardians for your children in the event of your incapacity.

Q: What are common misconceptions many people have regarding trusts?

Renee: The largest misconception is that if you have a trust, you will have to pay nothing in taxes. This is untrue. A trust can assist you to reduce estate taxes. However, merely having a trust is not sufficient to make your tax liability disappear.

If you've been wondering about different options regarding trusts in your estate plan, hopefully these tips from Renee Linares Chin, Esq. can give you some ideas. If you have additional questions, definitely consult with your own attorney or financial advisor.

Reviewed May 2017


Renee Linares Chin Esq. is an attorney who regularly blogs about personal finances and estate planning topics. Visit her at @renelinareschin and her website ReneeLinaresChin.com.

Paige Estigarribia is a writer for The Dollar Stretcher who enjoys writing about food, frugal living, and money-saving tips. Visit Paige on Google+.

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