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Estate Planning 101

Having an Estate Plan is an important part of being financially prepared to preserve your wealth and leave a legacy.

Estate Planning Diagram

A person’s estate is all of their property owned at death. If they have a Will, that document states who inherits the estate. If they die without a Will, state law determines who will inherit their estate. In both cases, if they have enough assets, a probate court has to supervise the settling of the estate. 


A trust is a legal agreement in which a person (Grantor) states that one or more people (Trustees) hold the Grantor’s assets for certain people (beneficiaries) subject to certain duties and the terms of the agreement. The most common type of trust is called a revocable living trust, but there are others.


A person may set up a living trust to hold certain assets (like their house) during their lifetime, and then give those assets to others at their death. Assets held in the living trust do not go through probate, which is why most people set them up.

But, that person almost certainly owns other assets in their own name (like their everyday checking account, their car, and their tangible personal property). Those things are part of that person’s estate, not their trust.  They would ordinarily have a special kind of Will (called a pour-over Will) that says that all of these things should be added to their trust upon their death. That way, there’s just one set of instructions about who gets what.


A Little More About Trusts

What Is an Irrevocable Trust?

An irrevocable trust is a trust where the terms generally cannot be modified or changed once it is finalized, at least not without the permission of the beneficiary or beneficiaries of the trust. The grantor of the trust legally transfers their ownership of the assets used to fund the trust and relinquishes any ownership rights to those assets.

Irrevocable trusts are generally used in conjunction with estate planning. Placing assets in an irrevocable trust will get these assets out of the grantor’s estate and they will not be subject to any estate taxes that the estate may incur.

Irrevocable trusts can also be used to shield assets from a potential lawsuit or other legal action. Professionals such as doctors and others who might be subject to legal action often use these trusts to shield the assets they wish to pass on to their heirs. Types of assets that can be used to fund the trust include life insurance policies, real estate, securities or cash and an interest in a business.

The three key players in a trust are:

  • The grantor. This is the person who establishes the trust and who funds it with the assets that are intended for the trust’s beneficiaries.

  • The beneficiaries are those who will benefit from the trust when the transfer of the assets within the trust are triggered by an event such as the passage of a certain amount of time or the death of the grantor.

  • The trustee is the person or organization in charge of administering the trust under the terms of the trust agreement.


Living Trusts

A living irrevocable trust is formed and funded by the grantor during their lifetime. Some examples of a living irrevocable trust include:

  • Irrevocable life insurance trusts (ILIT) contain one or more life insurance policies as the funding mechanism. The trust actually becomes the owner of the life insurance policies. The ILIT distributes the death benefit to the heirs free of any estate taxes. If the beneficiaries were to die before the insured person, the death benefit could end up back in that person’s estate where it could be subject to estate taxes if the estate was large enough.

  • A Grantor Annuity Trust (GRAT) allows the grantor to contribute assets to the trust and receive an annuity payment for a time. After that period, the assets revert to the trust beneficiaries tax-free.

  • Charitable remainder and charitable lead trusts are both types of irrevocable trusts in which a charity is the ultimate beneficiary. Under a charitable remainder trust, the grantor receives payments over their lifetime, with the amount left in the trust reverting to the charitable beneficiary upon their death. With a charitable lead trust, payments are made to the charity for a period of time, then the rest goes to the beneficiary of the trust.


Testamentary Trusts

A testamentary irrevocable trust is one that is created after the death of the creator of the trust. The trust is funded with proceeds from the estate of the trust’s creator. The only way any changes can be made to the terms of the trust is to alter the trust creator’s will before they die.


Revocable vs. Irrevocable Trusts

The other main type of trust that is often used is a revocable trust. They can also be used in estate planning and as a way to title assets in some cases.

The main differences between the two types of trusts are:

  • The owner of a revocable living trust can change the terms of the trust at any time, the creator of an irrevocable trust cannot.

  • Irrevocable trusts offer tax shelter benefits for the assets used to fund the trust this is not the case with a revocable living trust.

  • Irrevocable trusts offer a level of creditor protection, revocable trusts do not.

  • The creator of a revocable trust can change the trust beneficiaries as they see fit, this is not the case with an irrevocable trust.

  • The creator of a revocable trust can remove assets from the trust, this is not the case with an irrevocable trust.

Benefits of Irrevocable Trusts

There are several benefits to using an irrevocable trust.

  • Legal protection from creditors, as mentioned above. Depending upon the laws in your state, transferring assets to an irrevocable trust can potentially shield these assets from creditors under a number of scenarios including bankruptcy of the grantor. Depending upon the local laws, creditors may also be prevented from any sort of claw back of the assets.

  • Estate planning benefits. With the increase in the amount of assets that can be exempted from the estate tax, this isn’t as prevalent a need as prior to the tax reforms enacted in late 2017. For those with assets potentially above these thresholds, the assets used to fund the irrevocable trust are exempt for their estate and won’t be subject to estate taxes.

  • Qualifying for Medicaid and other benefits. Medicaid benefits are in part based upon an applicant’s assets. An irrevocable trust can be a way to move these assets out of someone's control to both help them qualify for the benefit and to be able to pass the assets on to their desired heirs instead of spending them on care needs.

  • A special needs trust is one in which the assets are designated for the care of a disabled beneficiary. These trusts can also be used to help these beneficiaries meet the income restrictions for aid such as Social Security disability and other forms of aid. These can be very complicated vehicles and it is wise to engage the services of an attorney who is well-versed in this area.

Most Common Irrevocable Trusts

Common Mistakes with Do-It-Yourself (DIY) Estate Plans & Wills

Though they cost less, there is a certain amount of caution one should use if they choose to go the DIY route to save a few bucks. In the end it could end up costing much more than the cost to have a professional set up your estate plan.

  • Wills are only one part of a comprehensive estate plan that fully protects you and your family. Even if your DIY will meets all your state’s requirements and is legally valid, the will alone is unlikely to be sufficient to address all of your estate planning needs.

  • DIY estate plans may not conform to the applicable law. The law that applies to estate planning is determined by each state—and there can be wide variations in the law from state to state.

  • A DIY estate plan could contain inaccurate, incomplete, or contradictory information. For example, if you create a will using an online questionnaire, there is the possibility that you may select the wrong option or leave out important information that could prevent your will from accomplishing your goals.


  • A DIY estate plan may not account for changing life circumstances and different scenarios such as:

    • The passing of a beneficiary.

    • Beneficiaries who are indebted to creditors.

    • Selling of property or assets that were owned at the time of the creation of the estate plan.

  • Mistakes in executing the plan. Under the law, there are certain requirements that must be met for wills and other estate planning documents to be legally valid. Though they may vary by state, these factors may include the following:

    • Age: The testator must be at least 18 years old or an emancipated minor.

    • Capacity: The testator must be of sound mind, which means capable of making decisions and reasoning, at the time the will is signed.

    • Signature: The will must be signed by the testator or by another person under his direction and in his presence.

    • Witnesses: Two competent witnesses must be present when the testator signs a Florida last will and testament in order for it to be valid. The witnesses must also sign the will in the presence of the testator and of each other. 

    • Writing: In some states wills must be written. Holographic, or handwritten, wills are not recognized as valid.

    • Notarized: For a valid power of attorney, some states require only the signature of the principal (the person who is granting the power of attorney) to be notarized, but some states require the signatures of both the principal and the agent (the person who will act on behalf of the principal) to be notarized. In other states, one or more witnesses are required—and these requirements may also differ depending upon the type of power of attorney (financial vs. medical) you are trying to execute.

    • Funding: Even if you have created a DIY trust, if you do not fund it, that is, transfer title of your money and property into the name of the trust, it will be ineffective, and your loved ones will still have to endure the probate process to finish what you started. Further, if you do initially transfer title of all your assets to the trust, it is likely you will acquire additional property or financial accounts over the years that must go through probate if title is not transferred to the trust.

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