Everyone wins when estate planning attorneys, financial advisors and accounting professionals work together on a comprehensive, trust based estate plan. Each of these professionals can provide their insights when helping you make decisions in their area. Guiding you to the best possible estate planning options tends to happen when everyone is on the same page, says a recent article “Choosing Between Revocable and Irrevocable Trusts” from U.S. News & World Report.
What is a trust and what do they accomplish? Trusts are not just for the wealthy. Many families use them to serve different goals, from controlling distributions of assets over generations to protecting family wealth from estate and inheritance taxes.
There are two basic kinds of trusts: revocable and irrevocable. Revocable trusts can be revoked or changed by the creator, known as the “grantor.” Irrevocable trusts are difficult and in some instances and impossible to change, without the complete consent of all beneficiaries.
There are pros and cons for each type.
Let’s start with the revocable, or living trust. The grantor can make changes at any time, from removing assets or beneficiaries to shutting it down entirely. When the grantor dies, the trust becomes irrevocable. Revocable trusts are often used to pass assets to adult children, with a trustee named to manage the assets until directed to distribute assets. Some people use them to prevent their children from accessing wealth too early in their lives, or to protect assets from spendthrift children with creditor problems.
The revocable trust protects the grantor’s wishes, if the grantor becomes incapacitated. It also avoids probate, since the assets are outside of the probated estate. The revocable trust may include qualified assets, like IRAs, 401(k)s and 403(b)s.
However, there are drawbacks. The revocable trust does not provide tax benefits or creditor protection while the grantor is living.
Irrevocable trusts are just as they sound: they can’t be amended once established. The terms cannot be changed, and the grantor gives up any control or legal right to the assets, which are owned by the trust.
Giving up control comes with the benefit that assets are no longer part of the grantor’s estate and are not subject to estate taxes. Creditors, including nursing homes and Medicaid, are also prevented from accessing the assets.
Irrevocable trusts were once used by people in high-risk professions to protect their assets from lawsuits. They are now commonly used to divest assets from estates, so people can become eligible for Medicaid or veteran benefits.
Your estate planning attorney will know which type of trust is best for your situation, and working with your financial advisor and accountant, will be able to create the plan that minimizes taxes and maximizes wealth transfers for your heirs. Don’t delay – get started today!
Reference: U.S. News & World Report (Aug. 26, 2021) “Choosing Between Revocable and Irrevocable Trusts”