Estate planning can be a complex process for many individuals and families, and many struggle with unusual challenges that prove difficult to resolve. Often, simple estate planning tools like a Last Will and Testament are insufficient to meet those challenges, and that’s when many people turn to living trusts to meet their needs. In most cases, those individuals tend to focus on revocable trusts to better organize and manage their affairs. Unfortunately, the revocable trust is not always the ideal way to resolve those issues. If you’ve discovered that a revocable trust just isn’t good enough to accomplish your goals, you might need an irrevocable trust instead.
What Are Trusts?
If you’ve made it to the point where you’re already trying to choose between a revocable and irrevocable trust, then chances are that you are already at least somewhat familiar with trusts. If not, then it’s important to understand what they are so that you have insight into how they work. That insight can help you to determine whether a trust is right for you, and which type of trust you might need.
All trusts have several key elements in common. Trusts require a grantor, a trustee, and beneficiaries. The grantor is the person who creates the trust. He or she is also the person responsible for funding the trust with assets – money or other real property of value. Those assets are then managed by the trustee, who is tasked with preserving or growing their value and ensuring that they are used for the benefit of the beneficiaries of the trust. Those beneficiaries are the designated persons for whom the trust is created.
Trusts also contain specific terms, which are instructions created by the grantor to control how the trust is managed, when and how distributions are made, and other important considerations. Grantors can use the terms of a trust to set conditions on distributions, restrict the trustee’s discretionary power, and can even set investment and growth goals.
Revocable versus Irrevocable: Does it Matter?
There are two main categories of living trusts: the revocable trust, which can be revoked or amended by the grantor at any time during his life, and the irrevocable trust which cannot. When most people think of “trust” they automatically think of the revocable trust. The reasons for that are easy to understand, of course. Not only is the revocable trust the more commonly known type of trust, but it’s also the most attractive from a personal standpoint. With a revocable trust, you can typically name yourself as the trustee and thus maintain control over your assets while you’re still alive. That choice isn’t available with an irrevocable trust.
In fact, the irrevocable trust leaves you with no control over the assets in the trust, and no way to revoke the trust or regain ownerships of that wealth. For that reason alone, many people are reluctant to create these trusts. The idea of giving up that level of control over any part of our lives tends to be at odds with most people’s instincts. Even so, the creation of an irrevocable trust doesn’t necessarily mean that you need to sacrifice all the benefits that those assets can provide. It is possible to create irrevocable trusts that contain income-generating assets, and then direct that those assets distribute that income to you on a regular basis.
Can an Irrevocable Trust Help You?
If you’ve examined the benefits offered by revocable trusts and found them wanting, then it’s almost certainly due to a need for protections that the revocable trust cannot provide. While a revocable trust can provide many advantages – probate avoidance, clear distribution of assets when you die, privacy, etc. – there are some things that these trusts cannot do. For example, your revocable trust cannot provide you with tax advantages. It provides no protection from creditors. It also is of little use when planning an inheritance for irresponsible heirs, planning for your long-term health care needs, or for dealing with a whole host of other special circumstances.
In those instances, an irrevocable trust can be a better option. An irrevocable trust can help with your estate planning needs when you need to:
- Minimize your estate tax obligations. Because the assets in an irrevocable trust are no longer yours, the government ignores them when calculating the value of your estate. That can enable you to reduce the size of your estate and the amount of wealth subject to any federal estate tax levy.
- Protect assets from future creditors. Creditors can generally only gain access to wealth that you can access. Since those assets in your irrevocable trust are beyond your reach, they are also inaccessible to litigants or other potential creditors.
- Secure an inheritance. Is your son a terrible spendthrift who wastes money as soon as he gets it in his hands? With an irrevocable trust, you can protect him from his own bad choices and any creditors he might owe.
- Plan for nursing home care. Medicaid won’t count money or assets in your irrevocable trust when it calculates your eligibility for nursing home benefits.
- Take care of any other estate planning needs that involve asset protection from heirs, creditors, or other persons and organizations. Because the assets in the trust are no longer legally yours, they are safely secured against claimants and preserved for the benefit of your heirs and other beneficiaries.
Get the Help You Need
Sometimes it’s easy to get so focused on one popular type of estate planning that we miss out on better solutions when they’re available. That’s the unfortunate case with irrevocable trusts, which can often prove to be the best option in instances where the revocable trust just won’t do. At Kulas Law Group, Medicaid & Estate Planning Attorneys, our trusts experts can help you to determine when an irrevocable trust is right for you, and will work with you to create a trust that meets your unique needs. If you’d like to learn more about how these trusts can benefit your estate planning effort, contact us online or call us today at (772) 398-0720.