Inter Vivos Trusts
UPDATED: June 19, 2018
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Inter vivos (intervivos) trusts are simply trusts created while you are still alive. This is opposed to testimentary trusts, which are created in your will and only enacted upon your death. There are many types of inter vivos trusts, all of which avoid probate court and some of which can even help you reduce and avoid estate taxes.
Revocable vs. Irrevocable Inter Vivos Trusts
Many people want to find the best solution for eliminating estate taxes for their surviving family. One misconception of inter vivos trusts is that all trusts created while you are alive avoid tax liability. Current tax law divides inter vivos trusts into two distinct categories: revocable and irrevocable. Revocable trusts can be canceled and controlled by the benefactor and are still accountable for estate taxes because no taxes are paid when assets are transferred into the trust. Irrevocable trusts, on the other hand, cannot be canceled or controlled by the benefactor, but are free of estate taxes because income taxes are paid whenever anything is deposited into the trust.
Inter Vivos Bypass Trusts
One of the most common trusts to create and activate while still living is a bypass trust. Bypass trusts are created to channel a married couple’s wealth in an effort to avoid tax liability for both the surviving spouse and the later beneficiaries. Under current tax law, couples can transfer money between themselves without any tax liability. However, doing so greatly increases the amount of tax liability owed by their surviving family. In order to avoid this, couples with a large estate can create a trust that provides for the needs of the surviving spouse while still removing money from their estate without tax consequences.
Some common inter vivos bypass trusts include AB trusts and ABC trusts. Both of these use the annual estate amounts to determine how much wealth can be channeled from the couple’s estate and how much must remain in a secondary trust for the surviving spouse.
Inter Vivos Guardianship and Conservatorship Trusts
Inter vivos guardianship trusts are created by parents to provide for the financial needs of their children in the event that both parents die. These trusts typically contain specific provisions that detail how the trust funds must be spent. Typically covered topics include the health, welfare, and education of the children.
Inter vivos conservatorship trusts are created for the care of someone in the event of incapacitation. With medical advances extending people’s lives much more than in previous generations, many people’s entire estate is spent on their care in the later years of their life. To avoid this problem and ensure that the incapacitated person’s portfolio is well managed, many couples will remove their wealth into a conservatorship trust. This trust can be phrased to simply allow another person the ability to manage assets or can be complex enough to limit the expenditures from the trust to only being released after measures such as insurance and government aid are exhausted.
Inter Vivos Spendthrift Trusts
No one wants to think of their wealth being squandered by an irresponsible child. A way around this problem is an intervivos spendthrift trust in which specific provisions prevent the beneficiaries from signing away their wealth and creditors from taking money from the trust.
Inter Vivos Charitable Trust
If you would rather avoid estate taxes and liability entirely and have no surviving offspring to concern yourself with, then creating a charitable trust may be a worthwhile consideration. Charitable trusts are created for the purpose of supporting a charitable cause over a long period of time. Charitable trusts can be created for churches, humanitarian organizations, and even schools and are free from any estate tax liability.