When you hear that there are revocable trusts and irrevocable trusts, a question may naturally come to mind. Why would you want to give up the freedom to revoke your trust if you have a choice?
We will look at the answer to the question in this post, and when you see the complete picture, you will have a renewed understanding.
Revocable Living Trust
A revocable living trust is the most common asset transfer vehicle in estate planning after a simple will. These trusts are useful for a wide range of people, and as the name would indicate, you retain the right of revocation. You can dissolve the trust at any time with no resistance.
When you establish this type of trust, you will be the trustee. As a result, you would have total control of the assets in the trust every step of the way. You name a successor in the trust declaration to assume the role after your passing or in the event of your incapacity.
Living Trust Benefits
The primary benefit of a living trust is the avoidance of probate. This is a time-consuming, expensive, and public process that is necessary when a will is used. With a living trust, the trustee can follow the instructions in the trust declaration without court involvement.
Secondly, you can include spendthrift protections when you have a living trust. The assets in the trust would be protected from creditors after your death. Plus, you can dictate staggered distributions over time to prevent poor financial decision-making.
Irrevocable Trusts
If you establish an irrevocable trust, you cannot act as a trustee, and with few exceptions, it cannot be revoked. This can sound very restricting, but there are some good reasons to use this type of trust.
Common Irrevocable Trust Utilizations
Irrevocable trusts can be effective in addressing specific situations like the ones below.
Medicaid Planning
Most seniors will need long-term care eventually, and nursing homes and in-home caregivers are very expensive. Medicare does not cover long-term custodial care, so this is not the financial solution.
Medicaid does pay for long-term care for seniors if you can gain eligibility. Since it is a need-based program, you cannot qualify if you have more than $2,000 in countable assets in your name.
In an effort to trim down your countable assets, you could transfer resources into an irrevocable Medicaid trust. When you do this, the principal will not count if you apply for Medicaid. However, you would be able to receive income that is generated by the assets in the trust.
Here’s the catch: You have to fund the trust at least five years before you apply for Medicaid. There is a five-year look-back provision in place to stop people from transferring assets after they find out they need long-term care.
Estate Tax Efficiency
The estate tax is only a factor for estates valued in excess of $13.99 million. Clearly, this is not an issue for most of us, but there are irrevocable trusts that can be used to gain estate tax efficiency.
Special Needs Planning
Let’s say you have a loved one with a disability that is on your inheritance list. They are relying on Medicaid and Supplemental Security Income, which are need-based programs. If you leave them a direct inheritance, it could impact these benefits.
As a response, you could find an irrevocable supplemental needs trust. The assets in the trust would not be the personal property of the beneficiary, so benefit eligibility would not be impacted. The funds can be used by the trustee to enhance the beneficiary’s quality of life.
These are a few of the purposes that are served by irrevocable trusts, but there are others.
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Our firm can help you create a plan that is tailor-made for you and your family. To set the wheels in motion, send us a message or call our Overland Park, KS estate planning office at 913-521-2828.
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