What Kind of Trust Do I Need to Protect My Assets?
- Phoenix S. Ayotte, Esq.
- Apr 1
- 7 min read
Updated: May 22
Protecting your assets isn’t just about saving money—it’s about making sure your hard-earned nest egg is passed down the right way. But with so many trust options available, how do you know which one is best for your situation? Some trusts offer tax advantages, others provide more control over distributions, and some are designed to shield assets from creditors or legal claims.
Whether you're planning for retirement, securing an inheritance for loved ones, or protecting your estate from unnecessary risks, choosing the right trust is crucial. Let’s break down the different types of trusts and how they can help you safeguard your financial future.
In this blog, we’ll cover the foundational trusts for estate planning.
Foundational Trusts for Estate Planning
a. Revocable Living Trusts
This is a flexible estate planning tool that allows individuals to manage their assets during their lifetime and specify how those assets will be distributed upon their death. The grantor (the person who creates the trust) retains full control and can modify or revoke the trust at any time. This is the most common trust we set up when your asset portfolio is relatively uncomplicated.
Why Use a Revocable Living Trust?
Avoids Probate: Assets placed in the trust bypass probate, ensuring a faster and more private distribution to beneficiaries. Therefore, their inheritance is protected and not drained by court fees, professional fees, and taxes during the probate process. Additionally, your personal information and asset distributions are kept out of the public record.
Flexibility & Control: The grantor can modify or dissolve the trust as their circumstances change.
Incapacity Planning: If the grantor becomes incapacitated, the successor trustee (often your spouse, but whomever you decide to appoint) can manage the trust assets without court intervention.
Continuity of Management: The trust allows for seamless asset management without legal complications after the grantor's death. **If you have a business interest, it's very important to have special provisions included, and for your business's governing documents to mirror what the trust directs.
When to Use a Revocable Living Trust?
If you want to avoid the lengthy and costly probate process for your heirs.
If you prefer to retain control over your assets while planning for future incapacity.
If you want to maintain privacy, as probate records are public, trust documents remain private.
If you own property in multiple states, a revocable trust can help streamline property transfers.
Types of Revocable Living Trusts
Individual Revocable Trust: A trust created by an individual person to manage their assets and determine distribution upon their death. This provides flexibility while avoiding probate.
Joint Revocable Trust: A single trust document created by two spouses (or partners) to manage their joint assets during their lifetime and dictate the distribution of those assets upon their death.
Simplicity: A joint trust is a single document that governs all the assets of both spouses. It simplifies the process and management of assets during the lifetime of the couple, as both spouses jointly manage the trust.
Revocability: Joint trusts are often revocable, meaning the terms can be modified or revoked during the lifetime of the trust creators. This gives flexibility if circumstances change.
Estate Tax Planning: The trust can be structured to allow for efficient estate tax planning. For example, it can take advantage of the marital deduction, which allows spouses to transfer assets to each other without incurring estate taxes.
Efficiency in Administration: After one spouse dies, the surviving spouse can continue to manage the trust without much legal complexity, as all the assets are already placed under one unified structure.
Avoids Probate: Like all trusts, a joint trust avoids probate, which can be a lengthy and costly process for the family.
Reciprocal Trusts: Refers to two separate trusts, one for each spouse. Each trust mirrors the other, with the assets of one spouse being left to the other spouse’s trust upon death. The key here is that the trusts are structured similarly, but each spouse has control over their own separate trust.
Estate Tax Avoidance: The use of reciprocal trusts is often part of an advanced estate tax strategy. By establishing reciprocal trusts, each spouse can gift assets to the other’s trust, effectively allowing them to maximize the estate tax exemption without triggering the estate tax on the first spouse’s death.
Spousal Exemption: The IRS allows spouses to transfer assets between each other without incurring estate taxes, but there can be complications if both spouses leave assets to each other’s trust. When structured properly, reciprocal trusts can avoid this issue, thus ensuring both spouses use their estate tax exemptions.
Capital Gains and Step-Up in Basis: One of the reasons your attorney may prefer reciprocal trusts for certain clients is that they can help with the step-up in basis of assets at the time of death. If assets are placed in a reciprocal trust, both spouses can receive a step-up in the value of the assets upon the death of the other, potentially reducing capital gains tax if the assets are later sold.
More Control Over Assets: With reciprocal trusts, each spouse can have more individual control over their respective assets, and the trusts can be more easily modified or revoked independently.
Complexity: Reciprocal trusts can be complex to set up correctly and must be structured carefully to avoid triggering unintended tax consequences, such as the "reciprocal trust doctrine", which could potentially invalidate the entire strategy if the IRS sees the trusts as a mere tax avoidance strategy rather than an independent estate planning tool.
Do We Need a Joint Trust or Reciprocal Trusts?
The decision between a Joint Trust or Reciprocal Trusts depends on your specific goals for estate planning, particularly related to tax benefits, control over assets, and how you want assets distributed after death.
Choose Joint Trust if:
You and your spouse want simplicity and a unified approach to managing your estate.
You’re seeking a more straightforward way to avoid probate and manage assets during your lifetime.
Estate tax concerns are less of an issue, or you’re in a situation where a combined exemption is more beneficial than separating assets.
You don’t mind giving up some degree of control over separate assets (since all assets are in a single trust).
Choose Reciprocal Trusts if:
You’re seeking to maximize estate tax exemptions or minimize estate tax liability through careful planning.
You want separate, individual control over your respective trusts, but you and your spouse still have a coordinated estate plan.
You’re concerned about capital gains taxes and want to ensure that both spouses benefit from a step-up in basis at the time of each other’s death.
b. Irrevocable Trusts
An irrevocable trust cannot be revoked by the grantor. In comparison to a revocable trust, where the grantor is treated as owning trust assets (and so taxed on income and capital gains), income and gains on assets held in an irrevocable trust are not taxable to the grantor. Instead, such income is taxable to the trust itself (a separate tax-paying entity), or to the beneficiaries who receive income (on their individual tax returns.)
** A grantor may retain the power to make investment decisions, control the distribution of income and principal to the beneficiaries, and to add or delete beneficiaries. However, retaining these powers frustrates the purpose of achieving income and transfer tax savings.
c. IRA Beneficiary Trust
Is a specialized trust designed to hold an IRA (Individual Retirement Account) upon the death of the IRA owner. It is typically used when you want more control over the distribution of IRA assets and to ensure the assets are passed down according to your wishes while maintaining certain tax advantages. Here’s why and when it’s typically used:
Why Use an IRA Beneficiary Trust?
Control Over Distributions: An IRA beneficiary trust allows the account holder to control how the IRA’s assets are distributed after their death. This can be particularly useful if you want to ensure that the beneficiaries do not access the funds all at once, or if you want the funds to be distributed over time.
Protection for Beneficiaries: If the IRA owner has beneficiaries who may not be financially responsible, have creditor issues, or are minors, the trust can provide added protection. It can limit access to the funds and ensure that the inheritance is used wisely.
Stretch IRA Benefits: For some beneficiaries, a beneficiary trust can provide a "stretch" option, allowing the IRA funds to be distributed over a longer period of time, thus potentially reducing the income tax burden. While the SECURE Act (passed in 2019) has largely eliminated the "stretch IRA" for most non-spousal beneficiaries, some carefully drafted beneficiary trusts can still allow for extended payouts for certain beneficiaries (like disabled or chronically ill individuals).
Minimize Risk of Improper Beneficiaries: By using a trust, you can specify who exactly inherits the IRA and prevent accidental or unintended beneficiaries from receiving the funds.
When to Use an IRA Beneficiary Trust?
When you want greater control over how the IRA is inherited: This includes ensuring the funds are distributed to beneficiaries over time (rather than in a lump sum), and stipulating specific conditions or restrictions on how the funds may be used.
If your beneficiaries are not financially mature or are minors: A trust ensures that they can’t access the funds until they reach an age or meet certain conditions.
If you have concerns about creditors or divorce: The trust can help protect the IRA from potential creditors or lawsuits.
To ensure compliance with tax rules: A properly structured IRA beneficiary trust can help maximize the tax benefits of IRA inheritance.
However, not all situations require an IRA beneficiary trust, and it can be complex to set up, so it’s important to consult with an estate planning attorney and financial planner to determine if it’s right for you.
Choosing the Right Trust to Protect Your Assets
Understanding the different types of trusts is essential for safeguarding your wealth and ensuring your estate is managed according to your wishes. With the right trust in place, you can protect your assets from unnecessary taxes, creditors, and legal complications. When you consult with an attorney at Future Counsel, LLC, you ensure the trust drafted for your aligns with your financial goals and provides the protection you need. Remember, the right trust isn’t just about passing down wealth—it’s about protecting your legacy for generations to come.
Need Expert Guidance?
If you’re in Virginia, Maryland, or Washington, D.C. (DMV) and need a lawyer to establish the right trust for you, Phoenix S. Ayotte, Esq. of Future Counsel is here to help! Protect your assets, ensure proper distribution, and gain peace of mind with a professionally drafted trust tailored to your needs.
