Can You Dissolve a Trust?

You may assume that a trust is a trust. In fact, there are different types of trusts, and a major dividing line is the matter of revocability.

Irrevocable Trusts

Generally speaking, an irrevocable trust cannot be dissolved after it has been created, but there are some rare exceptions. When you establish an irrevocable trust, you often cannot act as the trustee.

Why would you want to surrender control of your assets? This can be beneficial under a few different circumstances.

The federal estate tax is applicable on the portion of an estate that exceeds the exclusion. In 2021, the exclusion is $11.7 million, so this tax is not a factor for most people (though we are expecting significant tax law changes).

Irrevocable trusts are used by people who are exposed to the estate tax because assets that have been conveyed into this type of trust would no longer be part of their estates. Plus, there are ways that these trusts can facilitate transfers at a tax discount.

But one of the widely held estate planning myths is the idea that trusts are only for multimillionaires because they are used by the wealthy. Yes, they do in fact use some types of trusts, but there are other trusts that can be useful for people who are not among the financial elite.

The irrevocable, income only Medicaid trust is one of these trusts. Many elders seek Medicaid eligibility late in their lives because the program will pay for long-term care. Medicare does not cover custodial care, and it is very expensive so Medicaid eligibility is key.

You cannot qualify for Medicaid if you have more than $2000 in countable assets in your name, but your home is not counted. Though a home is not countable, Medicaid could put a lien on the property after your passing if the house is in your name at the time of your death.

As a response, you can convey income-producing assets, your home, and other countable resources into a Medicaid trust. You would be able to accept distributions of the trust’s earnings while you are living independently, but you would surrender access to the principal.

If you apply for Medicaid, the assets in the trust would not count as long as you funded the trust at least 60 months before you submitted your application.

Another type of irrevocable trust that some people utilize is the supplemental needs trust. This type of trust can be established to provide for a loved one with a disability without impacting eligibility for Medicaid and Supplemental Security Income.

Revocable Living Trust

In addition to the irrevocable trust, there is also the revocable living trust. You would be the trustee if you establish this type of trust, and you would be able to dissolve the trust so you would not be surrendering incidents of ownership or control.

As a result, the assets in the trust would count if you apply for Medicaid. They would also be available to litigants seeking redress, and they would be part of your estate for tax purposes.

When you use a revocable living trust, though, you can streamline the estate administration process. The assets that comprise the estate are under one umbrella of ownership, and the probate court is not involved during the administration phase.

If you have concerns about the spending habits of someone on your inheritance list, a living trust is a better choice than a simple will. When you have a living trust, you can include a spendthrift clause, and the principal would be protected from the beneficiaries’ creditors after your death.

You can dictate the terms of the distributions, and you do not have to provide lump sum inheritances. If you are married, you and your spouse could potentially create a joint living trust, and this can be the ideal solution for some couples.

Schedule a Consultation Today!

Our doors are open if you are ready to work with an Ashland, KY estate planning lawyer to put a plan in place. As you can see, there are different tools in the estate planning toolkit, and we can explain your options so you can make fully informed decisions.

You can call us at 606-324-5516 to schedule a consultation.  Our Florence, KY location can be reached at 859-372-6655, and our Charlotte, NC and Huntersville, NC locations can be reached at 704-944-3245. If you would rather send us a message, fill out our contact form and we will get back in touch with you promptly.