Estate Planning in Arizona: What are Revocable and Irrevocable Trusts?
Most people only think about a last will and testament when it comes to estate planning, but there is also the option of creating a trust to protect and pass on your assets to your loved ones. A trust can be revocable or irrevocable, and there are specialized options depending on your particular financial situation or asset portfolio. You might be wondering — what is a trust? How does it differ from a will? What are the differences between revocable and irrevocable trusts? Does a trust mean you avoid probate?
As a reminder, Arizona Statewide Paralegal is a certified legal document preparer in Arizona. While we have extensive experience drafting living trusts and wills and handling probate matters, we are not licensed and practicing attorneys. This means we can not interpret the legal language found in various paragraphs of a trust nor can we give you legal advice on what is best for you. If you need specific legal questions addressed, we are happy to refer you to an estate planning attorney near you who can interpret the specific legal terms with which you need assistance.
If you are looking at estate planning tools, the following is a general overview of revocable and irrevocable trusts.
What is a Trust?
In the most general sense, a trust is a legal entity that someone, who is known as the trustor, creates, in which a second party, known as the trustee, manages the trustor’s property and assets for a third party, who is known as the beneficiary. Essentially, a trust is a financial arrangement that involves three parties who are holding assets for specific named beneficiaries. Typically the Trustee is the person who owns the assets that are being transferred to the Trust during their lifetime so that they still retain control of the asset.
Trusts do not replace wills, as they typically only deal with the specific assets that you transfer to your Trust, like a piece of property, a bank account or motor vehicles. A will directs the distribution of nearly every other item in your estate that is not already co-owned or that does not list a beneficiary, like personal property, real estate and any other assets not transferred to the trust.
Some reasons for using a trust will vary, which is why there are so many different types of trusts available depending on someone’s particular needs. In most cases, a trust is used to manage assets while you are alive and/or after your death. It can provide options for a lesser-taxed way to transfer assets to beneficiaries. Depending on the trust you choose and its terms, there are some trusts that may also even provide benefits for the trustor while still alive.
Revocable Versus Irrevocable Trusts
As their names suggest, the main difference between revocable and irrevocable trusts is whether or not they can be changed. A revocable trust means it can be rescinded or canceled, while an irrevocable trust can not. Revocable trusts can be terminated, changed, or somehow altered by the trustor during his or her lifetime.
A revocable trust is often created to transfer assets outside of probate, and all three parties might even be the same person here because you are allowed to manage your own assets, in which case it would be handed off to a successor trustee and the named beneficiaries upon the death of the trustor. Contents of a revocable trust include assets that may change due to expenses or current depreciation or appreciation. Collectively, the asset portfolio is called the trust fund. Because the trust has at least one named beneficiary, it is eligible to avoid probate.
With irrevocable trusts, the trustor is prohibited from changing or altering it during his or her lifetime. It also can not be revoked once the trustor passes away. Because the assets can not be transferred back to the trustor, there is little to no estate tax liability. This makes irrevocable trusts a common estate planning tool. Trustees in irrevocable trusts are responsible for reporting tax information and making tax payments and are the owners of the trust.
Types of Trusts
There are dozens of different trusts that are available. You have to decide which one(s) work best with your situation and financial objectives. Here is a look at some of the different types of trusts available:
- Testamentary Trust: A testamentary trust is a type of irrevocable trust that is created and funded once the trustor dies. It is established per the terms of the trustor’s last will and testament. Since there is no one with the legal authority to change terms in a testamentary will when it becomes effective, it is automatically irrevocable.
- Generation-Skipping Trust: A generation-skipping trust, also called a dynasty trust, will allow you to transfer a large amount of money tax-free to your intended beneficiaries who are at least two generations younger than you. These people are typically your grandchildren. AZ Statewide Paralegal does not prepare this type of Trust.
- Credit Shelter Trust: A credit-shelter trust is also called a family trust or bypass trust and will allow you to draft a will that leaves a certain amount to the trust, but it can not exceed the current estate-tax exemption. The remainder of your assets will pass to your spouse with no tax liability. One reason a credit shelter trust is so popular is because it is free of estate tax forever, even if the estate grows.
- Irrevocable Life Insurance Trusts: As its name suggests, the irrevocable life insurance trust (ILIT) involves your life insurance policy. This will remove your policy from the taxable amount of your estate. To achieve this, you would have to surrender the rights of ownership. This means you can not change your beneficiary or borrow against it. In exchange, the policy proceeds will be used to satisfy any outstanding estate costs upon your death and then provide tax-free income to the named beneficiaries. Currently, you can fund an ILIT with up to $15,000 without the risk of a gift tax. The cash will allow the trust to purchase a life insurance policy, so you are not the owner for estate tax purposes. This will allow you to continue to transfer money to the trust on an annual basis to cover recurring premiums. If you were to own the policy then transfer it to a trust, the money would still be taxed unless you outlive the transfer by a minimum of three years. AZ Statewide Paralegal does not prepare this type of Trust.
- Qualified Personal Residence Trusts: Qualified personal residence trusts allow the trustor to remove their primary home or vacation home value from the estate. AZ Statewide Paralegal does not prepare this type of Trust.
- Qualified Terminable Interest Property Trusts: Families who have a history of divorces, remarriages, and step-children may be interested in qualified terminable interest property trusts. This type of trust allows you to direct assets to particular relatives. If you have a surviving spouse, he or she will receive income from the trust, and the beneficiaries you name, like children from an earlier marriage, will receive the remainder after your spouse passes away. AZ Statewide Paralegal does not prepare this type of Trust.
- Charitable Trusts: A charitable trust is one that has a non-profit organization or charity as its beneficiary. This is built up during the trustor’s life, and when he or she passes away, the assets would be distributed to the organization or charity of the trustor’s choice. It would reduce or avoid estate taxes and/or gift taxes. Charitable trusts can be included with a normal trust where the trustor’s beneficiaries would receive a portion of the trust when the trustor passes away, while the remainder of the trustor’s estate is given to the organization or charity. AZ Statewide Paralegal does not prepare this type of Trust.
- Blind Trusts: a blind trust is one that is handled only by the trustees without any knowledge of the beneficiaries. These are often used to avoid any risk of conflicts between trustees and beneficiaries or between the beneficiaries themselves.
AZ Statewide Paralegal does not prepare this type of Trust.
Learn More About Our Services
Arizona Statewide Paralegal offers document preparation services throughout Arizona, and we are proud to share that our staff is certified by the Arizona Supreme Court. We have a workforce of skilled legal document preparers who have been assisting Arizona clients with legal document preparation services since the 1990s.
While you may need to retain counsel for legal advice regarding estate planning, especially if you have questions about interpretation of specific legalese in irrevocable trusts, our proficient team can handle the document preparation and even some of the complex issues that may arise. Why spend thousands of dollars in attorney’s fees when you only need assistance drafting standard documents? We offer the same services without the hefty hourly rates. From drafting your will to creating a complex irrevocable trust, we can assist with all your document preparation needs within Arizona. Arizona Statewide Paralegal also offers the convenience of in-person consultations for those clients who feel more comfortable handling these types of legal matters in person.
As you conduct research online, you will see search results for many different legal businesses in the state who advertise their document preparation services. However, that is where most of their services end. These agencies offer no additional benefits beyond filling out your necessary forms. Once the preparation of your documents is completed, you will be expected to figure out how to handle everything else that needs to be completed. This can include filing the necessary documents with the appropriate court and, in some cases, hiring a process server to serve any necessary parties. These other document preparation agencies will not assist with any other pending issues, either. This means that if you have any additional questions on a specific process or need to know how to file the documents properly, you will incur additional fees from a completely different legal service.
At Arizona Statewide Paralegal, we take pride in offering exceptional customer service and maintaining a full-service agency. We will not leave you to fend for yourself with a mountain of paperwork that needs filing or make you figure out what court you need to contact, or whatever follow up needs to be done.
If you need other estate-planning related forms, or any other legal documents prepared, contact our skilled team at Arizona Statewide Paralegal to see how we may assist you. We take pride in providing fast and friendly service, while offering convenience, all at a reasonable low price. We have offices conveniently located in Tucson, North Tucson, Phoenix, and Mesa. Contact us today to learn more about Arizona document preparation services for your estate planning, probate, and other legal document needs. We look forward to helping you with all your document preparation needs.