When people hear that there are revocable trusts and irrevocable trusts, many have a question: Why would you want to lose the power revocation if it is not necessary? We will address the matter in this post.
Revocable Living Trust
The revocable living trust is the most commonly used estate planning document other than a will. As the name indicates, you do in fact retain the right of revocation. You can revoke or rescind the trust if you choose to do so, and you also have total control while the trust is active.
When you establish any type of trust, you are called the grantor. With a revocable living trust, the grantor will typically act as the trustee. This means that you would be the trust administrator, and you would control the trust on every level.
Incidents of Ownership
All of this ongoing control is a good thing on the one hand. On the other hand, you are retaining incidents of ownership in a legal sense. This means that the assets in the trust are considered to be your personal property. As a result, if you are sued, the assets would not be protected.
In addition, the assets in the trust would be part of your estate for estate tax purposes. Fortunately, this is not a factor for most people. The federal estate tax is levied on the portion of an estate that exceeds the exclusion, which is $13.61 million this year.
You may want to use a living trust instead of a simple will for a couple of different reasons. For one, a will is admitted to probate. This is a costly and time-consuming legal process. Probate is not a factor when a living trust is utilized.
Secondly, the assets would be protected from the beneficiary’s creditors after your death. In addition, you can dictate the terms of the distributions. In other words, you can instruct the trustee to provide limited distributions over an extended period of time.
You do surrender incidents of ownership when you have an irrevocable trust. The grantor cannot be the trustee of this type of trust. Though there are some exceptions, for the most part, you cannot change the terms. Let’s look at some applications.
Getting back to the estate tax, this is the type of trust that people use to gain estate tax efficiency. Assets that have been transferred into an irrevocable trust are no longer part of the grantor’s estate. There are a number of different types of trusts that facilitate tax-efficient transfers.
These would include the generation-skipping trust, grantor retained annuity trust, charitable lead trust, irrevocable life insurance trust, and qualified personal residence trust.
Special Needs Planning
If you want to provide for a loved one with special needs when you are planning your estate, benefit eligibility can be a factor. Many people with disabilities rely on Medicaid for health insurance, and Supplemental Security Income is self-explanatory.
You could convey assets into an irrevocable supplemental needs trust as a response. The trust would not negatively impact need-based benefits because the beneficiary would not directly own the assets. However, the trustee would be able to use the resources to make the beneficiary more comfortable.
Nursing Home Asset Protection
Many people use irrevocable trusts in an effort to gain Medicaid eligibility. Medicare does not pay for long-term care, but Medicaid will cover the cost if you can qualify. Assets that are held by irrevocable trusts are not counted if the grantor applies for Medicaid coverage.
With an income-only trust, the grantor can continue to accept distributions of the trust’s earnings while they are living independently. The principal would be out of reach, but it would not be countable for Medicaid eligibility purposes.
Inheritance Protection Upon Remarriage
Let’s say that you are a parent, and you are divorced from your former partner with whom you had your children. At some point, you decide to get remarried, and your spouse-to-be is quite a bit younger.
It is statistically likely that you will pass away first, and this raises some estate planning concerns. You feel as though you want to provide for your spouse appropriately, but you also want to be sure to leave your children the inheritances that you have planned.
Under these circumstances, you can use an irrevocable qualified terminable interest property trust to achieve the best of both worlds. Assuming you predecease your spouse, your surviving spouse will receive distributions of the trust’s earnings for the rest of their life.
However, they would have no access to the principal, and they would not be able to change the terms of the trust. After their passing, your children will inherit the assets that remain in the qualified terminable interest property trust.
When you have an irrevocable trust, you must designate a trustee to act as the administrator. This can be any mentally competent adult that is willing to assume the role. However, trustworthiness and some degree of financial acumen are necessary qualities.
If you do not know anyone personally that would be a viable candidate, there is another option. Professional fiduciaries like trust companies and the trust departments of banks can be engaged to administer trusts, and this can be the ideal solution in many cases.
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To see the dates and obtain more information, visit this page: Hilton Head, SC estate planning webinars.
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Two-thirds of American adults do not have estate plans in place. Plus, there are many people who have plans that are out of date. If you fit into one of these categories, it is time to take action to make sure that your wishes are carried out when the time comes.
You can schedule a consultation at our Bluffton, SC estate planning office if you call us at 843-815-8580. If you would rather send us a message, fill out our contact form and we will get back in touch with you promptly.
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