Trusts as Estate Planning Tools

Brian Burton

  • A trust allows the grantor to put conditions on how certain assets are distributed
  • It is important to understand the critical distinctions between revocable and irrevocable trusts
  • The SECURE Act might disrupt the estate planning many have done with their retirement accounts

The topic of estate planning is one that many would like to avoid for as long as possible and the reason is pretty simple: most people are reluctant to discuss what Benjamin Franklin referred to as the only two certainties in this world, death and taxes.  This is where a common misconception lies — estate planning is not all about your death – it’s more about the level of control you want over your assets, both while you’re living and after your death.  While there are many ways to gain control over your assets, the most common form is a simple will.  A will allows you to arrange for the distribution of your possessions, name guardians for any dependent children, and to name your executor, the person who will be in charge of your estate.  Wills do however, have limitations and may lack the flexibility and creativity that a trust can provide.


A trust in simple terms is a legal agreement between three parties:  the grantor, the trustee, and the beneficiary or beneficiaries.  A trust allows the grantor to put conditions on how certain assets are distributed upon your death.  The grantor (also referred to as the trustor or settlor) is responsible for creating the trust agreement; the trustee manages the assets that are titled in the name of the trust; and the beneficiary is the person or entity which receives the benefits of the assets titled in the name of the trust.  The trust is considered funded when the grantor transfers legal title of the assets to the trustee at which time the assets are considered “in trust”.


Trusts are formed to address numerous concerns or reasons and come with varying levels of complexity.  For example, trusts are either living trusts (established during a person’s lifetime) or testamentary trusts (set up in a will and established after a person’s death).  Beyond that, living trusts are considered either revocable (grantor retains control of the assets) or irrevocable (grantor gives up control of the assets). To assist us with a few of these areas we reached out to one of our trusted estate planning resources, Bart Rogers, Member of Frost Brown Todd LLC.  Bart mentioned, “Clients need to know the components of a trust and, most importantly, understand the critical distinctions between revocable and irrevocable trusts.”  Bart went into further detail regarding these distinctions and the advantages/disadvantages of both:


Revocable trust – “The grantor may amend, modify or revoke a revocable trust.  Under current Kentucky law, a trust is a revocable trust unless the grantor expressly states in the trust agreement that the trust is irrevocable.  In its rudimentary form, the grantor, the trustee and the beneficiary may be the same person.  This is the popular “revocable living trust,” where assets owned by the grantor are transferred to the grantor as trustee, for the benefit of the grantor for life.  Additional beneficiaries may be added, such as the grantor’s spouse and/or children.  The revocable living trust is often called a “will substitute” because it appoints a successor trustee upon the grantor’s incapacity (to manage the assets for grantor) or death (to manage and/or distribute assets to beneficiaries).  The trust agreement is a private document and is not subject to probate.  Thus, the assets in trust and the dispositive terms of the trust agreement are not placed in the public records of the probate court.  The revocable living trust allows a family to keep private assets private.”


Irrevocable trust – “A grantor may expressly state that he or she does not retain power to modify, amend or revoke, and that the trust is irrevocable.  The irrevocable trust is the foundation of many high-end estate planning techniques.  In addition to the traditional function of asset management by a trustee for beneficiaries over some period of time, the irrevocable trust may be used in gifting or selling assets, usually family-owned, closely-held business assets, to maximize income tax, gift tax, estate tax and generation-skipping transfer tax savings.  Most esoteric planning devices, such as the ILIT (irrevocable life insurance trust), the GRAT (grantor retained annuity trust), the QPRT (qualified personal residence trust), the CRUT (charitable remainder unitrust) and the IDGT (intentionally defective grantor trust), just to name a few, are all irrevocable trusts in their most fundamental form.”


Although trusts are not essential to every person’s estate plan, for many, a trust or combination of trusts may provide important advantages over a will.  For example, greater flexibility with how assets will be distributed, avoiding the time delay and publicity of probate, and reducing estate taxes just to name a few.  With regard to trust planning, we advise speaking with a trusted estate planning attorney and we are always happy to help facilitate that conversation.


SECURE Act – As of Jan. 1, 2020, the rules for paying certain retirement accounts to beneficiaries have changed and could have an impact on trust planning.  For example, for 401(k) and IRA owners who died before 2020, their retirement accounts can be stretched over the lifetimes of their beneficiaries.  Under the new law, a 10-year payout rule applies in many cases for account owners who die after 2019, causing many to consider revising their current estate plan.  Anyone that has named a trust as the beneficiary of a retirement account should take a hard look at that planning to ensure the original intention is still being met.  Many trusts which were created to manage a stretch payout to one or more beneficiaries, will now after the passing of the SECURE Act be forced to distribute fully within 10 years of death.  If you are concerned about how this new law might affect your estate plan, please don’t hesitate to reach out to us.