Is a GST Trust Revocable or Irrevocable?
Estate planning, very simply, is the process of preparing documents, such as a will or trust, to ensure that upon death, your property will be distributed to the proper people.
Although many people are most familiar with the Last Will and Testament, for individuals who have estates as simple as the family home and a few bank or investment accounts, or as complicated as real estate held all over the United States and multiple businesses and investment accounts, the Trust is the preferred estate planning device.
A trust is created very simply with a legal document which creates an arrangement where the assets held in the trust are controlled by the trustee for the benefit of the beneficiaries named in the Trust.
Most trusts are initially established where the person creating the trust transfers his or her own property into the trust, and that person creating the trust is also the trustee and beneficiary, with the result that the person creating the trust retains full control and benefit from the trust assets.
In Nevada, it is possible to design a trust that can help protect future generations in your family, to reduce taxes and ensure that one’s family members, such as a spouse, children and grandchildren, are taken care of financially.
What types of trusts are there?
One main benefit of a trust is it allows you to avoid probate of your estate upon death.
Probate is a court-monitored process that determines several things including the validity of a will, what property should be transferred, what creditors need to be paid, and what to do with leftover assets. It can be a time consuming and expensive process.
There are several types of trusts that are available in Nevada. One is the asset protection trust. This is a trust that is often created to protect a beneficiary from negative actions like divorce, transfer taxes, or bankruptcy.
A living trust is one that is set up to designate someone as a trustee for an estate. The individual setting up the trust can be the trustee of their own living trust, and they would keep full control over their assets while they are alive.
Another option is a charitable trust. This is set up in the name of an organization, usually a non-profit or private foundation, and it helps direct and protect all assets. A special needs trust is also known as a supplemental needs trust. It assists with needs associated with mental, behavioral, or physical disabilities.
A directed trust allows an appointed trustee to work with corporate trustees to make decisions on behalf of the trust.
Finally, a GST trust, also known as a legacy or dynasty trust, is a long-lasting estate planning tool that is designed to protect several generations.
What is a GST trust?
As mentioned above, a GST trust is created to hold assets for multiple generations. GST stands for generation-skipping-transfer.
Some people think that the term “generation skipping” means that the benefit of the trust skips a generation, such as, instead of the children inheriting, the trust goes to the grandchildren. But this is not correct. Your children may still be the beneficiaries of the generation skipping trust; the “skip” means the impact of the estate tax skips to the next generation; and if the trust is drawn property, the “skip” of estate taxes can actually continue, at least in the state of Nevada, for 365 years (that’s years, not days).
Receiving an inheritance through a generation skipping trust is perhaps the best way to inherit substantial assets.
Beneficiaries of the GST trust can use all of the assets and property in the trust without the risk of losing the assets to creditors or other intervening factors like death or divorce.
In some cases it is recommended to hire an independent corporate trustee to help administer a GST trust. A corporate trustee is a third-party that is appointed to help with managing assets, filing tax returns, and keeping records. Due to the nature of the length of a GST trust, hiring a company to act as a trustee will ensure that the assets are protected for future generations.
On the other hand, if you trust your heirs to handle the trust properly, the beneficiary may be given substantial control over the trust established for the particular beneficiary. In addition, the beneficiary can be given the power to designate a successor trustee for the subsequent heirs and to determine how the estate will be divided among subsequent heirs.
Is a GST trust revocable or irrevocable?
Most trusts created these days are revocable, which generally means that the creator of the trust, called the “trustor” or “settlor”, being the one who transferred assets to the trust, is also the trustee (i.e. the person who controls the investment and distribution of the trust assets), and is also the beneficiary (i.e. the person who gets to enjoy the use of the trust assets, e.g. live in the home owned by the trust, spend the trust money for personal uses, etc).
Generally persons create these revocable trusts for the purpose of providing for distribution upon their death to their designated heirs, similar to what a will does, but with the advantage over the will being that with the revocable trust, the estate is not subject to a court proceeding called probate.
Probate is the process whereby a deceased person’s estate is transferred to the rightful heirs. What a person is alive, that person can sign checks, sign deeds, etc. on their own behalf; but when a person is deceased, who can then sign off on the assets. The deceased person cannot, so a court must oversee the process of clearing title and rightful ownership of the decedent, which is what probate is all about.
Because probate requires the use of attorneys and the court system, in most states probate takes 6-12 months to complete and requires significant legal fees. With the revocable trust, the trust document names a trustee in place of the deceased person, then that succeeding trustee can take over the trust and distribute the assets according to the terms of the trust without the probate process.
As long as the individual who created the initial trust is still alive, the person may make changes to the trust including who the trustee and beneficiaries are, what assets are included, and the terms of the trust. They can also cancel the trust completely and make it invalid.
An irrevocable trust is, simply, a trust which may not be revoked. Once an irrevocable trust is created, it is generally more difficult than a revocable trust to modify.
However, if your attorney is familiar with the trust and tax rules, an irrevocable trust may still have powers built into the trust which allow for changes of trustees and beneficiaries.
Because of the flexibility which may be built into an irrevocable trust, a person should not fear setting up a trust which is labelled as “irrevocable.”
In addition, Nevada allows for “decanting” of an irrevocable trust. Decanting is the process of moving all assets from one trust to another. The new trust must have many similarities with the prior trust but allows for changes of certain provisions.
The GST trust must be drafted as an irrevocable trust. Nevertheless, the creator (“Trustor” or “Settlor”) of the GST trust may act as trustee of the trust and may retain power to determine investment of the trust estate and may generally distribute the trust estate among the beneficiaries according to a standard format, usually stated as for the “health, maintenance, education and support” of the named beneficiaries.
A capable estate planning lawyer can build may such powers into the GST trust, despite the fact that the trust is “irrevocable.”
Why make a GST trust?
As mentioned above, the main reason for making a GST trust is to skip the probate process and minimize taxes on future generations. It is a beneficial option for individuals with wealth and for those that want to protect what assets they have to ensure that their children or other heirs are taken care of financially.
The assets in the trust are also protected from future beneficiaries’ debts. This means that creditors your children, grandchildren, etc. cannot normally pierce the trust to pay the beneficiary’s debts.
GST trusts are also useful in directing how the assets will be distributed in the future. The trust may incorporate can have limitations, for example, that a beneficiary may only access the trust if they reach a certain age and milestone like staying sober, maintaining a certain GPA, or graduating college.
If these milestones are not met, the GST trust can hold the assets and not distribute them to the beneficiary until the conditions are met. This allows the creator of the trust to control the access which future generations may have to the trust funds.
Help with Estate Tax Planning
If you think the generation skipping trust might be worth considering for leaving some or all of your estate to your heirs, please call Grant Morris Dodds and ask to speak with one of our attorneys about the generation skipping trust.