A trust is one of the most popular additions to any comprehensive estate plan. Before you can decide if a trust is right for you estate plan, however, you need to understand how they operate and which type of trust is best for which type of estate planning goal. For example, when should you use an irrevocable living trust? The best way to determine which type of trust is best for your estate plan is to consult with an experienced Florida estate planning attorney; however, in the meantime it may help to learn a bit more about irrevocable living trusts.
All trusts are broadly divided into two types – testamentary and inter vivos, or living, trusts. A testamentary trust is a trust that does not become active until your death. A living trust, as the name implies, is a trust that becomes active during your lifetime. All trusts, however, share the same basic elements, including:
- Settlor – the Settlor, also referred to as the “Maker”, or “Trustor,” of a living trust is the person who creates the trust.
- Trustee – the Trustee is responsible for administering the trust which includes abiding by the trust terms and distributing the trust assets pursuant to those terms.
- Beneficiary – every trust must have at least one beneficiary, although a trust may have many beneficiaries. A beneficiary can be an individual, an organization, or even the family pet. Beneficiaries can be current or future, meaning they receive benefits now or in the future.
- Trust terms – the Maker of a trust establishes the terms of the trust. As the Maker, you may include almost any terms you wish as long as they are not illegal or unconscionable.
- Funding – a trust must have sufficient funding to accomplish the trust purpose. Funding may include almost any type of assets, such as cash, securities, or real property.
Revocable vs. Irrevocable Trusts
Living trusts are further sub-divided into revocable and irrevocable living trusts. A revocable living trust can be modified or revoked by the Maker at any time and for any reason – or for no reason at all. An irrevocable living trust cannot be modified or revoked by the Maker once it becomes active. Modifying or revoking an irrevocable living trust can usually only be done with court approval, and then only for a very good reason. Because it does not activate until the death of the Settlor, a testamentary trust is always a revocable trust until it takes effect at which time it becomes an irrevocable trust. Living trusts, on the other hand, can be revocable or irrevocable at the time of their creation.
When Is an Irrevocable Living Trust Preferable?
The type of trust you create will depend on the purpose of the trust. For some goals, such as incapacity planning, a revocable living trust works better. For other goals, however, an irrevocable living trust is the answer. Examples of when an irrevocable living trust works better include:
- Medicaid planning – if there is even a chance that you will not be able to pay the high costs of long-term care when you are older out of pocket — as is the case for the average person – you need to plan ahead to ensure that you will qualify for Medicaid, which will cover the costs. To qualify, however, the value of your assets must not exceed the very low program limits. One way to protect your assets and set yourself up for eligibility is to create a Medicaid trust. A Medicaid trust is an irrevocable living trust into which you transfer your assets. Although you can no longer benefit directly from the assets you can receive the interest earned on them.
- Asset Protection — once an asset is transferred into an irrevocable living trust it becomes the legal property of the trust. As such, you no longer have a legal ownership interest in the asset. If asset protection is your goal, this results in protecting the asset because if you no longer own the asset it is not vulnerable to things such as creditor claims, bankruptcy, or divorce.
For additional information, download our FREE solid estate plan checklist. If you have additional questions about irrevocable living trusts, or estate planning in general, in the State of Florida please contact the experienced estate planning attorneys at Kulas Law Group, P.A. by calling 772-398-0720 to schedule an appointment.