When laypeople hear about the fact that there are revocable trusts and irrevocable trusts, a natural question would come to mind… Why would you want to create a trust that you cannot revoke if there is an alternative? After all, circumstances could change, and you may decide that it is better to go in a different direction at some point in time.
This makes sense on the surface, but there are very good reasons why an irrevocable trust can be more beneficial in some instances. In this post, we will provide some clarity.
Revocable Living Trusts
Many people who are under the assumption that they should use a last will as a vehicle of asset transfer do not have all the facts. You may think that the executor who you name in your last will can distribute your assets to the heirs who are named in the document shortly after your passing. In reality, things do not work in this manner.
The executor would be required to admit the will to probate. During this process, creditors who may have claims must be notified by the executor, and there are a number of different tasks that must be completed to prepare the estate for distribution to the heirs.
One of the drawbacks of probate is the time consumption. Even if there are no particular complications, it will take about nine months to a year, and the inheritors have to wait it out.
Plus, there are expenses that accumulate during probate, and they can be considerable. These would include legal expenses, a filing fee, the executor’s remuneration, appraisal and liquidation charges, and other incidentals.
What are the advantages of using a living trust over a last will? One of them is the fact that the asset transfers would not be subject to probate and all of the problems that go along with it.
If you were to establish a revocable living trust, you would be called the trustor. The trustee is the individual who administers the trust, and the beneficiary can receive monetary distributions from the trust.
While you are alive, you would be able to act as the trustee and the beneficiary, so you would not lose any control of the assets. Since the trust would be revocable, you could dissolve it entirely if you ever choose to do so.
In the trust declaration, you would name a successor trustee and successor beneficiaries. After your passing, the trustee would follow your instructions and distribute assets to the beneficiaries.
If you want to prolong the viability of the trust, you could instruct the trustee to distribute limited resources over an extended period of time.
Incidents of Ownership
Since you have the power of revocation, and you can act as the trustee and change the terms of the trust. In a legal sense, you retain incidents of ownership when you convey assets into a revocable living trust. For this reason, the assets are technically still in your possession.
People create irrevocable trusts to surrender incidents of ownership for certain reasons. For example, many elders seek Medicaid eligibility during the latter stages of their lives, because Medicare does not pay for a stay in a nursing home.
Medicaid is only available to people with limited resources, so you cannot qualify if you have significant assets in your own name. To account for this, you could sign assets over to an irrevocable Medicaid trust. You would still be able to receive income that is earned by assets that are in the trust, but the principal would not count if you ever apply for Medicaid coverage.
Irrevocable trusts are also used by people who have estate tax concerns, and this type of trust can be established to provide for a loved one with a disability without impacting eligibility for need-based government benefits.
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