Michigan Living Trust and Trust Administration
Trusts can be used for many different estate planning purposes. Steiger Tax Law can review your goals and draft an appropriate trust with asset protection, probate avoidance and tax avoidance in mind. Below is an overview of different trusts, Michigan trust law, the purpose of a trust and important considerations.
What is a Trust?
A trust is a legal entity created under state law to hold or own assets for another person or entity. The person who creates a trust is called the "settlor" of the trust. The person or entity that benefits from the trust is called the beneficiary. The person or entity that manages the trust during the trust's existence is called the "trustee". The trust legal document identifies who the settlor, beneficiary and trustee are, the assets of the trust, and the rights and responsibilities of each.
Revocable versus Irrevocable Trusts
A key consideration is the decision to form a revocable versus an irrevocable trust. A revocable trust is common and like its name implies, can be revoked, changed, or modified by the settlor. It is common for the settlor, trustee and beneficiary to be the same person for a revocable trust, so modifying the terms of the trust is usually not a contested issue. Modifications might include changing the trustee, beneficiaries, the duration of the trust, when the trust becomes irrevocable, distributions, etc.
An irrevocable trust is one that cannot be changed after it is formed and funded without court approval. For some, forming an irrevocable trust is important for tax purposes and creditor protection. Once assets are transferred, the settlor generally cannot regain total control over them. It is difficult and expensive to modify an irrevocable trust, but this may occur when the purpose of the trust cannot be achieved without modification or when a trust is poorly drafted and all parties wish to modify the trust.
What is a Michigan Living Trust or Revocable Trust?
A revocable trust or "living trust" generally allows the settlor of the trust or a defined person or persons under the trust terms to change the terms of the trust. An irrevocable trust generally does not allow for revision or changes to the terms of the trust without court supervision and under limited circumstances. The settlor of the trust is the person or persons who fund the trust. The trustee of the trust manages or administers the terms of the trust and generally controls management of the trust assets, determines distributions, and is responsible for ensuring tax returns and other administrative activities are carried out to preserve the trust. The beneficiaries are individuals or entities like charities that receive distributions of the income or principal of the trust.
Why Use a Michigan Living Trust or Revocable Grantor Trust?
Estate planning using a trust or trusts should consider the need for creditor protection, the protection of potential spendthrift beneficiaries, the distribution of assets in the context of blended families, the ability of beneficiaries to effectively manage businesses, disability planning, and the need to retain control of assets. Trust administration can be expensive and should be carefully considered as part of an overall plan to manage and preserve wealth for spouses, children and future generations.
Michigan Living Trust or Revocable Living Trust
One of the most common estate planning trusts is the revocable grantor trust commonly referred to as a "living trust" or Michigan revocable living trust. The settlor, or owner of the trust, typically has complete control over this type of trust during the settlor's lifetime. The settlor may revoke the trust while alive and change the trust terms without court supervision.
Does a Michigan Living Trust Avoid Probate?
Assets transferred to a living trust are not subject to probate. These assets will not be made public in a probate court record but will be managed by the trust's trustee subject to the terms of the trust.
How Does a Living Trust Work After You Die in Michigan?
Upon the death of the settlor, the trust generally becomes irrevocable and the named trustee then administers the trust according to the terms of the trust. A careful review of the needs of the beneficiaries should be performed to ensure that the purpose of the trust is achieved. Importantly, assets held in the trust do not become part of the probate estate and the trust is generally administered outside of probate. Clients must take care to properly transfer and title assets in the name of the trust to avoid probate. This trust is commonly used in conjunction with a pour-over will.
The income of a revocable grantor trust is taxed to the settlor of the trust. For practical purposes, this means that the trust is disregarded as a separate taxable entity for income tax purposes while the settlor is alive. Planning is required to determine the tax consequences of the trust upon the settlor's death. Depending on the type of income earned, tax planning may be necessary to avoid excessive taxation of the trust and reduced value to the beneficiaries.
Domestic Asset Protection Trust
Michigan clients looking to protect assets from future creditors may utilize a domestic asset protection trust. The domestic asset protection trust is a recent statutory creation under Michigan law. This type of trust is an irrevocable trust that allows the settlor to be the named beneficiary and retain some control over the assets while preventing creditors from reaching the assets.
Contact Michigan Estate Planning Attorney Andrew Steiger
If you need assistance with a Michigan estate plan that includes trust planning, contact Michigan estate planning attorney Andrew Steiger for more information.