Revocable trusts have become a fairly popular estate planning tool for many Americans in recent days, as many individuals and families have jumped aboard the “probate avoidance bandwagon.” Obviously, there are many benefits that attract these people to that type of trust, and there is no denying that the living trust is a great way to ensure that probate proceedings are rendered unnecessary for the settlement of your estate. At the same time, however, it is important to know that there is another type of trust out there that may be even more relevant for your estate planning strategy: the irrevocable trust. But how can you know when you need an irrevocable trust to accomplish your planning goals?
Irrevocable vs Revocable: Highlighting the Differences
It is important to avoid confusing revocable and irrevocable trusts so that you can better understand why one might be preferable to the other in certain circumstances. For while they do share some basic similarities, there are fundamental differences that must be understood if you are to adequately leverage any trust’s benefits. With both types of trusts, the basic structure is the same: there is a grantor who makes the trust, a trustee who administers the trust, and beneficiaries for whose benefit the trust exists.
In the case of the revocable trust, the grantor (you) can name yourself as trustee and beneficiary, while also naming a successor trustee and secondary benefits to administer the trust and receive its benefits when you die. Thus, even though you technically sign over your property to the trust, your ability to continue to manage and benefit from those assets means that you don’t lose total control over them. That’s one of the major differences between the revocable and irrevocable trust.
With the irrevocable trust, a different set of rules apply. You cannot serve as the trustee, and must instead appoint someone else to fill that role. You also lose your ability to directly manage those assets – though you can include trust provisions that place controls on how they can be used. You can also arrange the trust so that you benefit from any income that those assets might generate. As a general rule, however, you lose ownership and control over all assets in the trust once it is created and funded. And unlike the revocable trust, you cannot change your mind later and revoke the document.
Determining when an Irrevocable Trust Can Benefit You
Given that loss of control, you might wonder why you would ever need that kind of trust – especially when you can avoid probate and distribute assets using the revocable variety. The answer is simple: there are many instances in which a revocable trust simply cannot provide you with the asset protection you need to accomplish certain estate planning goals, due to the fact that your ability to revoke the trust means that you never actually lose full control of those assets while you’re alive. Here are some clear examples in which an irrevocable trust can accomplish things that cannot be achieved with an irrevocable trust:
- When you’re concerned about estate taxes. Since you give up ownership and control over your trust assets when that trust is irrevocable, those assets are not included as part of your estate when you die. That can enable you to minimize estate tax liability by reducing the value of your estate. This benefit isn’t available when you have a revocable trust, since those assets end up being calculated as part of your estate after death.
- When you need to protect assets. If you have assets that you want to protect from potential future creditors, bankruptcy proceedings, or even an ex-spouse, you need to ensure that those assets are neither owned by nor accessible to you. The irrevocable trust provides that wall of separation you need to keep those assets beyond the reach of those claimants.
- When you are trying to plan for Medicaid to cover nursing home costs. The Medicaid program can count assets in a revocable trust when it is determining your eligibility for nursing home benefits. The irrevocable trust shields those assets from Medicaid calculations, and can help you to avoid being in a position where you have to either give away a substantial portion of your assets or use spend-down strategies to reduce your estate value below the eligibility limits.
In addition to those special benefits, an irrevocable trust can be used in many of the same ways that you would use a revocable trust. For example, you can use this trust for a child with special needs, ensuring that your loved one receives an inheritance in a way that doesn’t interfere with eligibility for important government benefits. You can use these trusts to place controls on your heirs’ distributions – assigning certain conditions that must be met before an inheritance can be received, or distributing assets on a scheduled basis. You can even place spendthrift provisions in the trust to prevent an irresponsible heir from exposing the trust to his or her creditors.
In other words, the irrevocable trust gives you much of the same flexibility you enjoy with a revocable trust, while at the same time offering dramatically enhanced protection for your assets. And while the loss of ownership and control can be a scary thought for some people, there are even provisions that you can include in your trust to provide certain checks and balances that should give you greater peace of mind.
The experienced trusts experts at the Fouts Law Group, LLC can help you to attain that peace of mind with estate planning assistance that ensures that you receive the ideal trust for your specific needs. We’ll guide you through the trust creation process and make sure that your unique goals are met in a way that complements your broader legacy planning efforts. To find out more about how we can help you with your irrevocable trust needs, contact us at our website or give us a call at (678) 242-8344 now.
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