Understanding Trusts in South Carolina: Versatile Tools for Estate Planning

Trusts are powerful and highly versatile legal instruments used in estate planning to hold, manage, and distribute assets according to your specific wishes. While often associated with the wealthy, trusts can offer significant benefits for individuals and families across various circumstances, providing control, protection, and peace of mind.

Basics of a Trust

At its core, a trust is a legal arrangement involving three key parties:

1. Grantor (or Settlor/Trustor): The person who creates the trust and transfers assets into it.
2. Trustee: The individual or institution (like a bank or trust company) responsible for managing the trust assets according to the rules laid out in the trust document, acting in the best interests of the beneficiaries. The grantor can often serve as the initial trustee in certain types of trusts. Successor trustees are named to take over if the initial trustee resigns, becomes incapacitated, or passes away.
3. Beneficiary: The person(s) or entity(ies) who are entitled to receive income or principal from the trust, either during its term or upon its termination.

The Grantor establishes the trust agreement, which outlines the specific rules for managing and distributing the assets, the duration of the trust, and the powers and responsibilities of the Trustee. Once created, the Grantor must formally transfer assets into the trust’s name – a critical step known as “funding” the trust. Assets commonly held in trust include real estate, bank accounts, investments, business interests, and personal property.

The Core Distinction: Revocable vs. Irrevocable Trusts

Trusts generally fall into two main categories based on the Grantor’s ability to change them:

• Revocable Trusts (Living Trusts): As the name suggests, a revocable trust can be amended, changed, or completely revoked by the Grantor at any time during their lifetime, as long as they are mentally competent. The Grantor typically retains full control over the assets in the trust and often serves as the initial trustee.
• Irrevocable Trusts: Once created and funded, an irrevocable trust generally cannot be altered or revoked by the Grantor. The Grantor gives up control and ownership of the assets transferred into the trust. While this loss of control might seem disadvantageous, it’s precisely this feature that provides specific benefits, such as potential asset protection and estate tax advantages.

Revocable Living Trusts: Flexibility and Probate Avoidance

The Revocable Living Trust is one of the most common estate planning tools. Its primary advantages include:

• Probate Avoidance: Assets properly funded into a revocable trust bypass the court-supervised probate process upon the Grantor’s death. This can save significant time and expense, avoid public disclosure of assets and distribution plans, and allow for quicker distribution to beneficiaries.
• Incapacity Planning: If the Grantor becomes unable to manage their financial affairs due to illness or injury, the designated successor trustee can immediately step in to manage the trust assets for the Grantor’s benefit, avoiding the need for a costly and public court-supervised conservatorship.
• Continuity of Management: Asset management continues seamlessly both during incapacity and after death, without the interruptions often associated with probate.
  Privacy: Unlike Wills, which become public records during probate, trust documents generally remain private.
• Out-of-State Property: Holding real estate located in other states within a revocable trust can avoid separate, ancillary probate proceedings in those states.

While revocable, these trusts offer minimal asset protection from the Grantor’s own creditors during their lifetime, as the Grantor retains control.

Irrevocable Trusts: Protection and Tax Planning

Irrevocable trusts involve relinquishing control but offer distinct advantages, often utilized for specific planning goals:

• Estate Tax Reduction: By removing assets from the Grantor’s ownership, an irrevocable trust can reduce the value of the Grantor’s taxable estate, potentially minimizing or eliminating federal or state estate taxes.
• Asset Protection: Assets transferred into a properly structured irrevocable trust may be shielded from the Grantor’s future creditors or lawsuits, as the Grantor no longer legally owns them. (Note: Transfers made to defraud existing creditors can be challenged).
• Gift Tax Planning: Transfers to an irrevocable trust are considered gifts, potentially utilizing the Grantor’s annual gift tax exclusion or lifetime exemption.
• Specific Goals: Irrevocable trusts are the foundation for many specialized planning techniques.

Specialized Types of Trusts

Several types of trusts are designed to achieve specific objectives:

Irrevocable Life Insurance Trusts (ILITs)

An ILIT is created specifically to own life insurance policies. By having the trust own the policy, the death benefit proceeds are kept out of the Grantor’s taxable estate. The proceeds can then be used by the trustee to provide liquidity to the estate (e.g., to pay estate taxes) or be distributed to beneficiaries according to the trust terms, potentially offering asset protection for the beneficiaries as well.

Charitable Trusts

These trusts allow you to benefit both charitable organizations and non-charitable beneficiaries (like family members):

• Charitable Remainder Trusts (CRTs): You transfer assets to the trust, which then pays an income stream (either a fixed amount – CRAT, or a percentage of the trust’s value – CRUT) to you or other non-charitable beneficiaries for a set term or life. At the end of the term, the remaining assets pass to the designated charity(ies). CRTs offer an upfront income tax deduction and can avoid capital gains tax on the sale of appreciated assets within the trust.
• Charitable Lead Trusts (CLTs): These work in reverse. The trust makes payments to a charity for a set term, and at the end of the term, the remaining assets pass to non-charitable beneficiaries (e.g., children or grandchildren). CLTs are often used for gift and estate tax planning.

Special Needs Trusts (SNTs)

These are crucial tools for individuals with disabilities who receive or may receive needs-based government benefits like Supplemental Security Income (SSI) and Medicaid. Assets held in a properly drafted SNT are generally not counted as resources for determining benefit eligibility. This allows family members to provide financial support for the beneficiary’s quality of life (covering expenses beyond basic needs met by benefits) without disqualifying them from essential assistance.

Types of special needs trusts include:

• Third-Party SNT: Funded with assets belonging to someone other than the beneficiary (e.g., parents, grandparents). Assets remaining in the trust upon the beneficiary’s death can pass to other designated remainder beneficiaries, and there is no requirement to repay Medicaid. This is commonly used in estate planning.
• First-Party SNT (Self-Settled): Funded with the beneficiary’s own assets (e.g., from an inheritance or personal injury settlement). These trusts must include a provision requiring that upon the beneficiary’s death, any remaining funds are first used to reimburse the state Medicaid agency for benefits paid during the beneficiary’s lifetime.

Other Specialized Trusts

Depending on individual circumstances and goals, other types like Grantor Retained Annuity Trusts (GRATs) or Qualified Personal Residence Trusts (QPRTs) might be considered for advanced gift and estate tax planning.

Funding Your Trust: A Critical Step

Creating the trust document is only the first step. For a trust to be effective, especially a revocable living trust aimed at probate avoidance, assets must be formally retitled into the name of the trust. This might involve recording new deeds for real estate, changing titles on brokerage accounts, or updating bank account ownership. Failure to properly fund the trust means the assets may still be subject to probate.

Choosing and Implementing the Right Trust

Trusts are complex legal documents with significant financial and legal implications. They are not one-size-fits-all solutions. Selecting the appropriate type of trust, drafting it correctly to comply with South Carolina law and achieve your specific goals, choosing the right trustee, and properly funding the trust require careful analysis and in-depth knowledge of these instruments.

An experienced South Carolina estate planning attorney can help you understand the benefits and drawbacks of different trust options, design a trust tailored to your unique family and financial situation, and ensure it integrates seamlessly with your overall estate plan, including your Will and powers of attorney.

Contact The De Bruin Law Firm to explore how trusts can play a role in protecting your assets and providing for your loved ones.