Trusts are among the most important tools in estate planning. They offer strong protection for assets and they can be customized to suit many family situations and goals.
Unlike your will, your trust can go into effect during your lifetime. This way, you can start enjoying the asset protection properties of a trust while you are still around, and continue that protection for your loved ones after you are gone.
Living wills can be either revocable or irrevocable. There are advantages and disadvantages to each type, so it’s wise to think long and hard about your main objectives when creating your will.
First, let’s briefly go over the basics of trusts.
Making a living trust
A trust is a legal construction that divides ownership in property. When you create a trust, you are known as the grantor. As the grantor, you place assets under the control of a trustee and you name the trust’s beneficiaries. The trustee manages the assets and transfers them to the beneficiaries according to the terms of your trust.
When creating a living trust, it’s common for a grantor to name themselves as beneficiary and their loved ones as successor beneficiaries. This way, the trustee manages the assets and makes regular payments to the grantor during their lifetime After the grantor dies, the trustee continues making payments to the successor beneficiaries.
In this way, the assets in the trust are not counted in the grantor’s estate when they die. This means they are not subject to the probate process, which can be slow and expensive.
When you make your trust revocable, you retain the right to make changes to the management of the trust during your lifetime. For example, you may decide to increase the payments you receive from the trustee. As the name implies, you can even revoke the trust altogether. Some grantors even name themselves as the trustee. The legal relationship is much more complicated than, say, having a savings account, but it does give you a relatively high degree of control.
There are tradeoffs for choosing this level of control. For one: You have access to the assets in the trust, but that may be true of others as well — the IRS and your creditors may be able to seize assets in your trust under some circumstances. Another disadvantage is that the trust assets may be counted against you when you apply for benefits from programs such as Medicaid, which have strict financial eligibility requirements.
Compared to revocable trusts, irrevocable trusts offer much greater asset protection, but that, too, comes at a price. If you have placed the assets in an irrevocable trust, they’re generally safe from your creditors and the IRS, but it’s also much harder for you to get them.
Another possible disadvantage is that it’s more complicated to set up an irrevocable trust than a revocable one.
What’s most important to you?
When choosing between an irrevocable or a revocable trust, you must decide which of your goals is most important. If your main priority is asset protection, then you may decide that an irrevocable trust is your best choice, even if it leaves you with less control. However, if you are not ready to give up that degree of control over the assets, you may choose a revocable trust.