When it comes to estate planning, you’re sure to ask what instruments are available to make your estate as secure as possible. Part of this process entails learning about the various types of Trusts available and determining which one would be most beneficial to you. Continue reading to learn everything there is to know about revocable and irrevocable inter vivos trust and whether it is the best solution for you.
What is an Inter Vivos Trust?
An inter vivos trust, also known as a living trust, is established by a grantor during their life rather than after their death under the terms of a will.
An inter vivos trust is another term for a living trust, which is a trust established during the grantor’s lifetime. The inverse of an inter vivos trust is a testamentary trust, which is established after the grantor’s death.
An inter vivos trust, which can be revocable or irrevocable, can provide a secure and discreet mechanism to transfer assets to beneficiaries outside of the probate process as part of an estate plan. When it comes to leaving an inheritance for a loved one, the inter vivos trust has a particular advantage over wills and testamentary trusts. Furthermore, trust assets are not accessible to anybody other than the trustee, making inter vivos trusts an important aspect of elder law and advance planning to safeguard against elder abuse.
How an Inter-Vivos Trust Works
A trust is often created to hold assets for the benefit of a group of people known as trust beneficiaries. A trustee is usually appointed to oversee those assets and ensure that the trust agreement is implemented, which includes ensuring that the assets are delivered to the stated beneficiaries.
An inter-vivos trust, on the other hand, is a living trust since it permits the owner or trustor to use the assets and benefit from the trust during the trustor’s lifetime. When the trustor dies, the assets are dispersed to the beneficiaries by the trustee. While still alive, the trustor, or trustors in the case of a married couple, can be the trustee, administering the assets until they are unable to do so, at which point a named backup trustee takes over. A living trust can fall into one of two types of trust: revocable or irrevocable.
#1. Revocable Inter Vivos Trust
A revocable trust is one that allows the trustor or grantor to make changes to the trust. The trust can also be cancelled by the trustor, and any income generated by the revocable trust is distributed to the trustor. Following the death of the trustor, the trust’s income and assets are distributed to the trust’s beneficiaries. Revocable trusts are useful because they are flexible throughout the trustor’s lifetime but also allow for the distribution of assets from the trustor’s estate.
#2. Irrevocable Inter Vivos Trust
An irrevocable trust is one that does not permit the trustor or grantor to make changes to the trust. Once formed as an irrevocable trust, the trust cannot be cancelled or altered. When assets are placed in an irrevocable trust, the trustor relinquishes legal ownership of those assets. Upon the trustor’s death, the trustee would manage the assets and transfer them to the beneficiaries.
Establishing an Inter-Vivos Trust
When forming a trust, the grantor designates the trust parties, who include the grantors, generally the spouse; the beneficiaries; and the trustee. Spouses are sometimes named as trustees. However, in the case that both spouses die, a contingent trustee should be selected.
A trust can own just about any asset. Real estate, investments, and commercial interests can all be retitled in the trust’s name. Some assets, such as life insurance and retirement plans, are passed to a chosen beneficiary and do not require inclusion.
A trust might include instructions for the trustee to control the timing of distribution and management of the assets while they are still held by the trust, in addition to assigning assets to specific beneficiaries.
A will is required to carry out the trust. In essence, the trust is named as the primary beneficiary of a will. Furthermore, a will serves as a “catch-all” mechanism, determining the distribution of assets that may have been omitted from the trust. The will also create a guardianship for minor children.
Example of Inter Vivos Trust
A college education fund is one example of how an Inter Vivos Trust might be used. Assume you and your spouse have two small children and have decided to create an estate plan. You create two Trusts and name your children as beneficiaries, one Trust for each child. For the time being, you can contribute $5,000 to each Trust. You want to ensure that if something unforeseen happens, each child is left with something to help them get started in college. Because of the flexible terms of an Inter Vivos Trust, you can then continue to make further gifts to each Trust as you can. These trusts are Inter Vivos because they are established during your lifetime.
What is the Taxation of an Inter Vivos Trust?
Trusts can create income, such as a rental property put into the trust, and someone must pay taxes on it. The grantor owns the trust property in the eyes of the IRS for income tax purposes under a revocable inter vivos trust, thus they must report the income on their annual return.
Irrevocable inter Vivos trust, on the other hand, have their own tax identification number. The trustee submits a tax return for the irrevocable inter vivos trust and pays taxes with trust funds, which are distinct from the grantor. One of the advantages of an irrevocable trust is that the trust’s finances are kept separate from those of the grantor. Consult a financial counsellor or a tax specialist if you have any further questions regarding paying trust taxes.
The Advantages of an Inter Vivos Trust
Inter Vivos Trusts are a popular option because they offer numerous benefits to the grantors, their estates, and their beneficiaries. Here are some advantages that you may enjoy if you use an Inter Vivos:
- Allows you to retain ownership of assets during your lifetime.
- Avoid the probate procedure.
- Keeps financial information confidential.
- Assets are shielded from creditors.
- In comparison to other trusts, it is extremely adaptable.
- Aids in the reduction of estate taxes
An Inter Vivos Trust allows you to access and control its assets while you are still alive, which is desirable in and of itself. It’s a realistic alternative for those who want to set up a Trust and Will but still need to utilise and access the assets they’re putting into the Trust.
Avoid probate by transferring assets from an estate to a trust. The probate process is time-consuming and expensive, and it can deplete the legacy you intended to leave to your family. Court documents are often made public, exposing your family’s sensitive financial information. By avoiding probate, you can always maintain your privacy and keep nosy eyes at bay.
Read Also: BILATERAL CONTRACT: How It Works
Although you may be subject to creditors while you are alive, after you die, your living trust becomes an irrevocable trust. A future creditor cannot pursue you because the assets are owned by a Trust rather than an individual. You can create an Irrevocable Trust during your lifetime, but it is a separate sort of Trust that cannot be modified.
Inter Vivos Trusts also provide the owner with a great deal of flexibility when compared to other forms of Trusts. Some Trusts are legally binding, leaving you with limited leeway. Inter Vivos allows for a great deal of flexibility, such as allowing you to benefit from the assets while leaving the remainder to your beneficiaries following your death. Most Trusts have term limits and are only used for specific purposes.
Last but not least, a Living Trust can assist you to decrease your estate tax liability. If you live in one of the states that impose an estate tax, or if your estate exceeds the existing exemption, you may be subject to estate taxes. Because an Inter Vivos Trust permits you to use assets during your lifetime, you can carefully spend down or gift some of your assets to avoid exceeding the exemption level.
Testamentary trust
A Testamentary Trust is included in your final Will and testament and takes effect only upon your death. This sort of Trust is subject to the probate court, which is an important factor to consider. Some people, however, select this approach because they desire judicial scrutiny. Assume you have little children or a beneficiary with a handicap or mental condition. Following probate, the courts would ensure that the executor fulfils their tasks, like establishing the Trust and ensuring that assets are dispersed in accordance with your precise instructions.
It is important to note that an Inter Vivos Trust and a Testamentary Trust are only two types of trust.
Advantages of an inter vivos trust over a testamentary trust
Transferring assets into your trust, while you are still alive, allows them to avoid probate, reducing the cost and time it takes for your beneficiaries to receive an inheritance. A testamentary trust is established by the terms of your will, and it, too, will be subject to probate after your death. Similarly, the conditions of the testamentary trust are not private because they are published in the will, which becomes public in the end. Trusts, on the other hand, do not usually enter public records.
Here are some of the advantages of including an inter vivos trust in your estate plan:
- Beneficiaries can obtain their inheritance without having to go through the court system.
- You can cut the cost of probate.
- You have the option of keeping the specifics of your estate plan confidential.
Conclusion
It is totally up to you whether or not to establish an Inter Vivos Trust. A Living Trust is a fantastic alternative if you want to form a Trust now rather than one that will be triggered by your death. Some of the benefits include the chance to avoid probate and control and access assets during your lifetime. This adaptability is appealing to many families, and it is one of the many reasons why Inter Vivos Trusts are a popular estate planning instrument.
Choosing the appropriate Trust can be difficult, and we’re here to help. Check out the guides to learn more about various forms of trust, some of which we linked to in this post. It may feel overwhelming at first, but educating yourself is an excellent method to begin determining what you want and don’t want. Once you’ve developed an idea, you can seek the advice of a Trust & Will professional who can guide you in the proper route.
Inter Vivos Trust FAQs
What is the difference between an inter vivos revocable trust and a revocable trust?
Revocable trusts can also be used to arrange for the trust owner’s mental incapacity. While revocable inter vivos trusts offer the trust owns a great lot of flexibility, this type of trust is not ideal for all estate-planning needs.
What is the benefit of an inter vivos trust?
An inter-vivos trust has the advantage of avoiding probate, or the legal procedure of dividing the owner’s assets after his or her death. The trustee in an inter-vivos trust can also be the trustor during their lifetime or until a backup identified in the trust is authorised to take over.
What is inter vivos?
Inter vivos is a Latin word that means “between the living” or “while alive.” This expression is mostly used in property law and refers to numerous legal activities made by a person while they are still living, such as making gifts, establishing trusts, or transmitting property.
