When you hear that there are revocable trusts and trusts that cannot be revoked, you may wonder why you would voluntarily surrender control of your assets to an irrevocable trust. If you can accomplish the same goals with the ability to revoke the trust, isn’t that the better way to go?
In a perfect world, this would be the case, but there are legal realities that enter the picture here. Let’s look at the differences between these types of trust beyond the general right of revocation.
Revocable Living Trusts
A revocable living trust is actually the most commonly utilized type of trust in the field of estate planning. This is because it can be used as a substitute for a last will.
There are several reasons why many would say that a living trust is the better choice. One of them is the ability to streamline the estate administration process after your passing.
Another benefit is the ability to include spendthrift provision to protect a loved one who may not be great at handling money. You can also account for possible incapacity by naming a disability trustee to manage the trust if you ever suffer from cognitive impairment or another debilitating condition.
You can revoke or rescind this type of trust if you ever want to go that route so you retain complete control. From a broad legal perspective, the assets are still yours so you can remove or add property and change the terms at any time.
Irrevocable Trusts
It can sometimes be wise to divest yourself of direct ownership of assets for various reasons. When you surrender incidents of ownership, the assets are no longer under your control in the eyes of the law. An irrevocable trust can accomplish this.
Self- Settled Asset Protection Trust
One type of irrevocable trust that serves a specific purpose is a self-settled asset protection trust. You can use this type of trust if you want to protect assets from future creditor claims.
They are legal in a number of states, but North Carolina and Kentucky are not among them. People who are seeking this type of protection will sometimes establish asset protection trusts in a state that does recognize these devices.
Medicaid Planning
Most senior citizens will qualify for Medicare when they reach the age of 65. This will provide a reasonably strong health insurance underpinning, but there is one looming expense that is not covered at all.
The majority of elders will need living assistance eventually, and Medicare does not pay for it. Medicaid will pick up the tab for nursing home expenses, but you are probably aware that it is only available to people with a significant level of financial need.
In order to get assets out of your own name to qualify for Medicaid, you could convey them into an irrevocable Medicaid trust. Though you would not have access to the principal, you could continue to receive income generated by assets in the trust.
This arrangement would cease if you were to use the program to pay for a stay in a nursing home. Most of the income would be utilized to defray the nursing home costs.
Estate Tax Savings
Very high net worth individuals have to be concerned about the potential impact of the federal estate tax. It is currently only an issue for a relatively few people because the first $11.58 million can be transferred tax-free. Only the remainder would be subject to taxation.
If you are in this group, you could get assets out of your own name for estate tax savings purposes by conveying them into an irrevocable trust, or multiple trusts. There are a number of options, and the right choice will depend upon the circumstances.
Schedule a Consultation!
We are here to help if you would like to put a custom crafted estate plan in place. Our number in North Carolina is 704-944-3245 (Charlotte or Huntersville), and we can be reached in Kentucky at 606-324-5516 (Ashland, KY) or 859-372-6655 (Florence, KY). If you would rather reach out electronically, simply send us a message through our contact page.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
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