Inter-Vivos Trust

An inter-vivos trust, also known as a living trust, is a legal entity created during an individual’s lifetime for the purpose of managing and protecting their assets. This type of trust is often utilized in estate planning to ensure that assets are handled according to the grantor’s wishes, both during their life and after their death. The term “inter-vivos” is Latin for “between the living,” distinguishing it from a testamentary trust, which is created through a will and only takes effect after the grantor’s death.

Key Components of an Inter-Vivos Trust

Grantor

The grantor, also known as the settlor or trustor, is the individual who creates the trust and transfers assets into it. The grantor sets the terms of the trust, including how and when the assets will be distributed to beneficiaries.

Trustee

The trustee is the person or entity responsible for managing the trust’s assets according to the trust agreement’s terms. The trustee can be the grantor themselves, another individual, or a professional fiduciary institution. The trustee has a fiduciary duty to manage the trust assets in the best interests of the beneficiaries.

Beneficiaries

Beneficiaries are the individuals or entities entitled to receive distributions from the trust. The grantor designates the beneficiaries and specifies the terms and conditions under which they will receive the trust assets.

Trust Agreement

The trust agreement, also known as the trust instrument or declaration of trust, is the legal document that establishes the trust. It outlines the terms and conditions, including the duties and powers of the trustee, the rights of the beneficiaries, and the rules governing the management and distribution of the trust assets.

Types of Inter-Vivos Trusts

Revocable Trust

A revocable trust allows the grantor to retain control over the trust and its assets during their lifetime. The grantor can modify, amend, or revoke the trust at any time. This type of trust provides flexibility and allows the grantor to make changes as their circumstances or wishes change. However, because the grantor retains control over the assets, they are still considered part of the grantor’s estate for tax purposes.

Irrevocable Trust

An irrevocable trust, once established, generally cannot be altered, amended, or revoked by the grantor. This type of trust effectively removes the assets from the grantor’s estate, which can provide significant tax benefits and protect the assets from creditors. Since the grantor relinquishes control over the assets, they are no longer part of the grantor’s taxable estate.

Benefits of an Inter-Vivos Trust

Avoiding Probate

One of the primary benefits of an inter-vivos trust is that it allows the assets to bypass the probate process. Probate is the court-supervised process of distributing a deceased person’s estate, which can be lengthy, costly, and public. By placing assets in a trust, they can be transferred to the beneficiaries without the need for probate, providing privacy and potentially reducing legal fees and delays.

Continuity of Management

An inter-vivos trust ensures the continuous management of the grantor’s assets, even if the grantor becomes incapacitated. The trustee can step in to manage the trust assets without the need for court intervention, ensuring that the grantor’s affairs are handled according to their wishes.

Flexibility and Control

A revocable inter-vivos trust provides the grantor with flexibility and control over their assets during their lifetime. The grantor can make changes to the trust as needed and manage the assets in accordance with their wishes.

Asset Protection

While a revocable trust does not offer protection from creditors, an irrevocable trust can provide significant asset protection benefits. By transferring assets to an irrevocable trust, the grantor effectively removes them from their estate, potentially shielding them from creditors’ claims and certain legal judgments.

Tax Benefits

An irrevocable inter-vivos trust can provide tax benefits by removing the assets from the grantor’s taxable estate. This can reduce estate taxes and, in some cases, income taxes. Certain types of irrevocable trusts, such as Charitable Remainder Trusts and Qualified Personal Residence Trusts, offer specific tax advantages.

Considerations and Drawbacks

Complexity and Cost

Establishing and maintaining an inter-vivos trust can be complex and costly. Legal fees for setting up the trust, ongoing administrative costs, and potential fees for professional trustees can add up. It’s important to weigh these costs against the benefits provided by the trust.

Control and Flexibility

While a revocable trust offers control and flexibility, an irrevocable trust requires the grantor to relinquish control over the assets, which can be a significant drawback. It’s important to carefully consider whether the benefits of an irrevocable trust outweigh the loss of control.

Impact on Public Benefits

For individuals receiving public benefits such as Medicaid, transferring assets to an irrevocable trust could impact eligibility for these benefits. It’s important to consult with a knowledgeable attorney to understand how a trust may affect public benefits eligibility.

Funding the Trust

For an inter-vivos trust to be effective, it must be properly funded. This means that the grantor must transfer ownership of their assets into the trust. This can involve additional administrative steps and costs.

Use Cases in Estate Planning

Planning for Incapacity

An inter-vivos trust can be an effective tool for planning for the possibility of the grantor’s incapacity. By designating a successor trustee, the grantor ensures that their assets will be managed according to their wishes if they become unable to do so themselves.

Blended Families

An inter-vivos trust can help address the unique estate planning challenges faced by blended families. The grantor can specify how assets will be distributed among children from different marriages, ensuring that their wishes are carried out while avoiding potential conflicts and misunderstandings.

Privacy Concerns

For individuals who value privacy, an inter-vivos trust can provide a level of confidentiality that is not possible with a will. The trust agreement is not a public document, allowing the details of the grantor’s estate planning to remain private.

Special Needs Planning

An inter-vivos trust can be used to provide for a beneficiary with special needs without jeopardizing their eligibility for public benefits. A special needs trust or supplemental needs trust can be established within an inter-vivos trust to provide for the beneficiary’s needs while preserving their benefits.

Charitable Giving

Inter-vivos trusts can be used to facilitate charitable giving. A Charitable Remainder Trust (CRT) allows the grantor to receive income from the trust during their lifetime, with the remainder going to a designated charity. This can provide both tax benefits and a way to support charitable causes.

Conclusion

An inter-vivos trust is a versatile and powerful tool in estate planning. It allows individuals to manage and protect their assets during their lifetime and beyond, providing benefits such as avoiding probate, ensuring continuity of management, and offering potential tax advantages. However, the complexity and costs associated with establishing and maintaining an inter-vivos trust, as well as the potential impact on control and public benefits, necessitate careful consideration and professional guidance. By understanding the key components, benefits, and potential drawbacks, individuals can make informed decisions about whether an inter-vivos trust is the right choice for their estate planning needs.