Are you considering a trust but don't know which type of trust is right for you? When it comes to a living trust there are two main types: a revocable trust and an irrevocable trust. Many people are hesitant to put their assets into an irrevocable trust. The thought of putting a lifetime's worth of hard earned money and assets into an irrevocable trust is often frightening for many. However, in certain cases, utilizing an irrevocable trust can have significant benefits for you and your heirs.
What is the difference between a Revocable Trust and an Irrevocable Trust?
When it comes to living trusts, there are two main types:
a revocable trust- a type of trust that can be changed at any point while you are still alive
an irrevocable trust- a type of trust that cannot be changed. Once an irrevocable trust is funded, that is, once you title your property into an irrevocable trust, you cannot change your mind a week later and remove your property.
When is an Irrevocable Trust a good tool for you?
1. Creditor Protection : If you have assets that you wish to safeguard against potential litigants or other creditors in the future, a revocable trust isn’t enough. For legal purposes, the government still views the asset in a revocable trust as part of your estate. When the asset is in an irrevocable trust, a creditor cannot generally access them because the property is no longer your property because it belongs to an entity you don’t have access to.
2. Nursing Home Protection: Although Medicaid laws are ever changing, there are “look back “ provisions that allow Medicaid to deny an applicant coverage if they have too many assets. These look back provisions allow Medicaid to look back to any transfers you made within five years of the transfer (i.e. you can't sell all of your assets to your child for a dollar the day before applying for Medicaid). By placing your assets in an irrevocable trust at least 5 years prior to going into a nursing home, you can protect them from having to be spent down to get approved for Medicaid.
3. Protecting your Heirs from themselves: Do you have heirs who need to have their inheritances protected from their own poor decision making? Perhaps you have an heir with a gambling problem or an addiction. An irrevocable trust can enable you to place that inheritance in a trust that his or her creditors cannot reach.
4. Estate Tax Diversion: If your estate is large enough that your estate could be heavily taxed at the time of your death, transferring your wealth to an irrevocable trust can decrease your taxable estate to help preserve your wealth for the next generation.
Contact an estate planning attorney to learn more about the different types of trusts and what trust is best for you.