In Maryland, trusts created for estate planning purposes can help to avoid probate, protect the estate from disgruntled heirs, avoid having to file ancillary proceedings, or otherwise help you plan your estate. Trusts generally can be either revocable and irrevocable, each with advantages and disadvantages.
Revocable Trusts
A revocable trust allows the grantor to retain control over the trust assets during his or her lifetime. One of its primary advantages is that it bypasses the probate process, allowing for a smoother and more private transfer of assets upon death.
Generally, each spouse should have a revocable trust, but there are many occasions when a trust may be structured jointly. Upon the death of the first spouse, the trust can be divided into sub-trusts, such as a survivor’s trust or a bypass (credit shelter) trust, each designed to optimize estate tax exemptions and asset protection.
All assets should be transferred into the revocable trust to ensure the effectiveness of the trust. However, to further ensure all assets are captured within the trust structure, a pour-over may be executed alongside a revocable living trust. This legal instrument ensures that any assets inadvertently left outside the trust at the time of death are “poured over” into the trust and distributed according to its terms—still avoiding probate.
Revocable trusts can also incorporate provisions for beneficiaries who may lack financial acumen or legal capacity. Spendthrift provisions empower the trustee to control disbursements, protecting assets from creditors and poor financial decisions. Similarly, a special needs trust can be created within or alongside a revocable trust to support a disabled beneficiary without disqualifying them from essential government benefits.
Irrevocable Trusts
By contrast, an irrevocable trust cannot be amended or revoked without the consent of the qualified beneficiaries, as defined under the Maryland Trust Act, making it a more rigid but powerful tool—particularly for estate tax reduction, asset protection, and Medicaid planning.
These trusts can be either:
- Inter vivos (established during the grantor’s lifetime)
- Testamentary (established upon death through a Will).
A particularly popular form of inter vivos irrevocable trust at this time is the Spousal Lifetime Access Trust (SLAT). This type of trust allows one spouse to transfer assets to a trust for the benefit of the other (and potentially descendants), effectively removing those assets from the grantor’s taxable estate while retaining indirect access through the beneficiary spouse. SLATs are increasingly favored under the current high estate and gift tax exemption thresholds, which are expected to sunset in the coming years.
Testamentary trusts, unlike inter vivos trusts, are subject to probate, as they are created under the provisions of the Will. These trusts remain useful in cases where a delayed transfer of assets is desirable or where ongoing oversight is needed posthumously.
A number of sophisticated trust structures serve unique estate planning goals:
- Pot Trusts: These aggregate assets for the benefit of multiple beneficiaries, typically children, allowing the trustee discretion to allocate distributions based on individual needs, rather than dividing the estate equally.
- Spendthrift Trusts: Similar to their revocable trusts with spendthrift provisions, these provide robust protections against creditor claims and irresponsible spending, with the trustee maintaining distribution control.
- Qualified Terminable Interest Property (QTIP) Trusts: QTIPs allow income from the trust to be paid to a surviving spouse for life, with the principal ultimately passing to children or other heirs.
These trusts are crucial in marital deduction planning, ensuring tax deferral while preserving control over the ultimate disposition of assets.
- Generation-Skipping Trusts: Often employed in large estates, these trusts are designed to transfer wealth to grandchildren or further descendants, thereby avoiding double taxation through the Generation-Skipping Transfer (GST) Tax.
- Charitable Remainder Trusts (CRTs): A CRT will pay income to you or another person for a set term, and then to a charity of your choice, which will reduce your tax liability on several ends.
- Charitable Lead Trusts (CLTs): In contrast to CRTs, CLTs will pay income to a charity to a fixed term, and with the remaining assets going to your heirs.
If you are looking for specific trusts or estate planning tools to suit your needs in Howard County or Maryland, contact Saltzman Law today.
