Revocable vs. irrevocable trusts; what is the difference? We discuss the differences and why you would want one or the other. In short, a revocable trust is often used for estate planning but offers little to no asset protection. Typically, the one who created it can amend it without the aid of others. An example is a living trust. A properly drafted irrevocable trust can offer substantial asset protection, depending on its jurisdiction of formation. It can also offer estate planning, tax benefits and help one qualify for government programs such as Medicaid. Please read below for more details.
Creating a trust can be a good way to ensure that the assets you worked hard for are protected. In addition, trusts preserve your assets for your loved ones or other individuals or organizations you wish to benefit. Not all trusts, however, are created equal.
What a Revocable Trust Does
A revocable trust gives you, as the grantor (or trustor), considerable control over the assets in the trust. While this may work out well in the short term, it may not benefit you in the long run. This would depend on several factors, including the line of work you’re in and the type of assets you own. A revocable trust can protect your heirs from an expensive and lengthy probate battle. It can also aid in ensuring a smooth transition to a successor trustee, should a grantor be suddenly incapacitated.
What an Irrevocable Trust Does
An irrevocable trust, on the other hand, can provide some exemplary asset protection features. You can also save on estate taxes, as well as qualify for government assistance programs that require personal asset caps, such as Medicaid. The security you are offered is that you form the trust, with expert assistance, to your liking.
Setting It Up Right
The expert you hire to draft the document should balance the wording of the trust with two considerations. First, the trust should meet the legal needs so that it does what you want it to do. Second, within these parameters, it should do what you want it to do. Do you want your children to have a monthly income from your estate so they don’t blow it all in one shot? You can have the trust worded in this fashion. So, you need to examine your current situation and future financial plans carefully in order to decide what type of trust will work best for you.
What is a Trust?
A trust is a legal, fiduciary arrangement among a grantor, trustee and beneficiary. It provides for the ownership, management and distribution of assets where the trustee holds the assets for the grantor for the benefit of a third party, called a beneficiary. The grantor gives up his or her ownership of the assets that are to be transferred to a trust. The trustee holds assets and manages them according to the conditions stipulated in a trust deed. The grantor typically has input as to the initial wording of the trust. The grantor is also commonly referred to at the settlor, trustor or creator of the trust.
There are two main types of trusts: the revocable and the irrevocable trust. Before you can decide which type of trust best suits your situation, you must first consider how much control you want or need to retain over your assets. Keep in mind that you reap fewer immediate benefits when you exercise more control over your assets. Surrendering control allows you to enjoy greater potential benefits down the line.
How Much Control?
The amount of control you need to retain depends on several factors:
- Do you work in a field where there exists a high likelihood that you can be sued? This typically includes the medical and legal arenas, the construction industry, and business owners in general.
- Are you establishing a trust to ensure that a disabled loved one will be taken cared of when you die?
- Is the trust mainly to minimize taxation?
- Is it to avoid a potentially costly and lengthy probate?
A revocable trust can help take care of the last issue. An irrevocable trust can help take care of all four. Your answers to these questions, and several others, will form the basis for the eventual decision of whether to establish a revocable or irrevocable trust.
What is a Revocable Trust?
A revocable trust is sometimes called a living trust or an inter vivos trust. The grantor can modify the terms or conditions of a revocable trust at any time. All a grantor has to do is file a trust amendment to make any revisions he or she feels warranted. The grantor can also change the beneficiaries of a revocable trust at any time.
Maintaining this considerable level of control of your assets may be reassuring. Yet, as stated above, greater control means fewer prospective benefits down the road. A revocable trust cannot protect your assets from predatory claims. It may help your heirs avoid a probate, but won’t do much in terms of minimizing estate taxes. Assets in a revocable trust are taken into account when assessing your eligibility for government benefits with an asset limit. This would include Medicaid and Social Security Disability. You may be forced to spend down your assets before you can be deemed eligible for these types of programs. What then are the benefits of establishing a revocable trust?
Why Use a Revocable Trust?
A revocable trust is useful when a grantor becomes incapacitated and can no longer administer the trust’s assets. Without a trust, the beneficiaries have to go to court to obtain a conservatorship, which will manage the assets for them. With a trust, a trustee successor, designated at the time the trust is created, immediately takes over the grantor’s tasks. This allows for a seamless transition and, most likely, an uninterrupted disbursement of benefits as well.
Free Consultation with an Estate Planning Lawyer
When you are ready to plan your estate or administer an estate, call Ascent Law for your free consultation (801) 676-5506. We want to help you.
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West Jordan, Utah
84088 United States
Telephone: (801) 676-5506