What is a Trust?
Estate planning often involves setting up trusts. A trust is a legal agreement where property is held in order for it to be transferred after death. A trust does not have to go through the tedious, long and expensive process of probate. It is therefore important to know and understand the main types of trusts available: revocable and irrevocable trusts.
What is an Irrevocable Trust?
An irrevocable trust is slightly easier to understand because it is quite straightforward. It is the type of trust that cannot be amended, modified, changed, or revoked after the agreement has been signed. After you place property into an irrevocable trust, you give up ownership of it and can no longer retrieve it.
What is a Revocable Trust?
On the other hand, a revocable trust is much more flexible and can be changed at any time in response to changing circumstances. However, a revocable trust does not offer creditor protection. What this means is that assets funded into a revocable trust will still be considered personal assets for creditor and estate tax purposes. All trust assets will be considered yours for Medicaid Planning purposes, and may be subject to state estate taxes, federal estate taxes, and state inheritance taxes.
Which Trust Should You Establish?
These two different kinds of trusts can accomplish a variety of estate planning goals, each with their own benefits and drawbacks. Here are a few things to note about these two types if you are looking into establishing a trust:
A irrevocable trust is not flexible like revocable trusts. Once property is placed into the trust, that property now belongs to the trust, and not to you. Therefore, you should plan carefully so that you do not make a decision you will regret later on. There are also benefits to creating irrevocable trusts.
The most notable one is that there is an estate tax reduction. The assets placed into an irrevocable trust no longer count towards the value of a person’s estate, potentially reducing the estate tax they would otherwise owe upon death.
In addition, an irrevocable trust can be used to provide asset protection. By placing assets into an irrevocable trust, one can prevent these assets from being reached by a creditor, because they are no longer considered the property of the original owner. If you need assistance from nursing homes, it is important to protect your assets using an irrevocable trust, because if you create a revocable trust, your assets, which you originally intended to leave to your beneficiaries, can end up being used to pay for your nursing home bills.
With revocable trusts, you could revoke the trust or modify the terms at any time. If a significant event occurs, you may want to change your beneficiaries or update your finances. A revocable trust gives you the flexibility to do so. Revocable trusts are also advantageous because assets held in a revocable trust can still avoid probate and be passed directly to the beneficiaries named at the time of the person’s death.
Certain specific cases provide additional reasons to prefer the establishment of a revocable trust. For example, if you are someone who fears becoming incapacitated, because of genetics or another reason, a revocable trust may be the better option for you. Assets held in a revocable trust at the time a person becomes mentally incapacitated can be managed by a Disability Trustee; this allows individuals to plan for any issues that they think might come along in the future. You will still be able to control your assets until you become incapacitated, and you can also designate a trustee to manage your assets with your specific instructions.
Which Type of Trust is Fit for You?
Trusts can be extremely tricky and there are many factors to take into account if you are looking into establishing one. There are many types of trusts that are more specific than revocable and irrevocable trusts, and they may be more beneficial for you depending on your situation. If you are seeking guidance establishing a trust, contact top Estate Planning Attorney Inna Fershteyn for assistance. We can explain to you the different types of trusts and their functions, and we can advise you on how to select the best option for your unique situation.