If you want to protect your assets and pass them on to loved ones in the future, a trust is the legal framework to consider. An attorney can draw up a trust agreement to protect your assets while living and continue protecting your assets after you pass on.
But what type of trust is best for your situation? Answering the crucial question “Revocable vs Irrevocable Trust: Which Do You Need?” depends on your answer to one question:
- Do you need flexibility and control over your assets while living? (revocable trust) OR
- Can you let your trust’s terms (that YOU write) dole out resources to you and heirs over time? (irrevocable trust)
Irrevocable Trusts Offer More
An irrevocable trust offers more benefits than a revocable trust because you essentially no longer control those assets. You lose the right to change the trust’s terms once you’ve set it up. (unless you go through a long, complicated process called “decanting”)
You cede asset control to the trustee you appoint (occasionally, you may act as a co-trustee depending on your needs and goals). Legally, you no longer own your assets in an irrevocable type of trust. Your trust owns all assets that you place into it.
However, the benefits of an irrevocable trust are immense. And YOU set up your trust with the terms that YOU decide with your estate planning attorney.
Irrevocable Trusts Protect You While Living
While you are living, an irrevocable trust can protect your assets from:
Taxes
With an irrevocable trust set up during your lifetime, your trust can shield you from paying taxes on your trust assets. Investopedia puts it like this, “Irrevocable trusts are primarily set up for estate and tax considerations. That’s because it removes all incidents of ownership, removing the trust’s assets from the grantor’s taxable estate. It also relieves the grantor of the tax liability on the income generated by the assets.”
In other words, assets placed into an irrevocable trust don’t pay taxes for the trust’s income. You no longer pay taxes personally on the assets placed in the trust.
Cover Future Long-Term Care Costs
To benefit, you must set up an irrevocable Medicaid trust at least 5-years before you need to qualify for the government benefits covering long-term care costs.
Because you no longer own assets placed into an irrevocable trust, you can receive a monthly income from your trust that is below the qualifying income limits for Medicaid long-term care benefits. (You cannot be a trustee in a “Medicaid trust.”) Your Medicaid trust allows you to have income while Medicaid pays your home health care, assisted living, or nursing home care expenses.
Future Lawsuit Judgments
If you work or live in fear of a lawsuit, your irrevocable trust can protect your assets from future judgments. Because you no longer own the assets in your irrevocable trust, a court may not give those assets in a future judgment. However, if you face a pending lawsuit now, placing your assets in a trust to prevent judgment will not work.
Bankruptcy: Even a bankruptcy judgment against you can’t pull from your irrevocable trust to pay creditors. However, setting up a trust when you already owe creditors may not help. A court can reverse your trust if you set it up expressly to avoid paying creditors.
Trusts Protect Your Estate After You Die
Your trust can continue protecting your assets for your heirs’ benefit after you pass away. A revocable trust becomes irrevocable after you die. You can even name a charity as a beneficiary. Some charitable trusts help large estates avoid federal estate taxes.
Your estate’s heirs receive considerable benefits from a trust, including:
No Probate Costs
Your estate is free from probate costs (which can considerably reduce your estate assets). Instead, your trustee acts to distribute your estate without court interference. Avoiding probate also means avoiding a public display of your estate and public accounting of what you plan to give to each heir. Avoiding probate can prevent family discord and frivolous lawsuits that eat up your estate in court and attorney fees.
Help Special Needs Heirs
Your trust enables heirs with disabilities or special needs to qualify for crucial government benefits for daily living costs. These costs include essential benefits such as healthcare, transportation, and housing costs from SSI, SSD, or Medicaid. Heirs may receive allowable monthly income from your estate while still meeting eligibility requirements for necessary government help.
Avoid Estate Taxes (Irrevocable Trusts Only)
According to Kiplinger, “People who are willing to gift money every year can use these funds to purchase life insurance in an “irrevocable life insurance trust” that may avoid paying estate taxes when they die. Another is a “grantor retained annuity trust” that gives the Creator a set income stream for several years and may allow some of the principal to go to family members estate tax free.”
Depending on how you set up your trust, your estate assets are safe from:
Bankruptcy of Heirs
If you worry that your heir will go bankrupt, you can choose to give funds at a certain age or time or even give monthly benefits rather than a lump sum.
Creditors
In probate court, your estate can face frivolous bills from fraudulent creditors who learn of your estate in a public probate case. Assets in a trust do not go through probate.
Heirs’ Careless Behavior or Addictions
You can set up a trust to give monthly amounts or cover rent or education expenses only.
Divorce Settlements
A trust naming your child or grandchild as a monthly or future beneficiary will not go to their spouse if a divorce occurs. However, an NC court will consider a lump sum that goes into a married couple’s joint account or pays for real estate as joint property in a divorce. Giving a monthly or yearly sum instead assures the child of receiving assets after a divorce.
Recovery Costs from NC’s Medicaid Recovery Program
Many families realize too late that their parent’s estate must sell the family home to pay for the nursing home care costs their parent received from Medicaid.
Do More With Your Assets
Trusts give you a legal way to do more with your assets. If you own a sizeable estate, a trust is a no-brainer. Even for those of us with less to give, you may have essential needs that a trust can meet, such as a special needs child, avoiding probate, or qualifying for long-term care benefits while still receiving income from your trust.
We Can Help
Whatever your financial situation or goals for the future, you can trust Hopler, Wilms, and Hanna to help you draw up a trust that meets your needs. We work extensively with estate planning and prioritize finding the best legal frameworks to accomplish your goals.
Whether you worry about paying for future long-term care, Medicaid recovery creditors, or an heir’s addiction to shopping with credit cards, we can help. Contact us today to get started safeguarding your nest egg. Set up an initial consultation and find out how we can help you reach your goals for the future.
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