A trust can be an excellent estate planning tool to help individuals protect their assets for their loved ones and to ensure that they avoid paying tax liabilities on their assets when the grantor dies.
Two specific types of trusts are commonly used, a revocable trust and irrevocable trust. It is important that interested individuals understand the difference between these two instruments.
What Is a Trust?
A trust is a legal tool that is used to transfer ownership of assets from an individual, the grantor, to an entity, the trust. Many individuals choose to prepare a trust to avoid probate, to avoid paying estate taxes, and to protect assets or qualify for Medicaid.
The grantor creates the trust for the benefit of the beneficiaries. Also, the grantor is often the first beneficiary to the trust, as well as the first trustee. The trustee manages the assets of the trust during its existence. However, two different types of trusts are commonly used – a revocable trust or irrevocable trust.
What Is a Revocable Trust?
Under a revocable trust, the grantor maintains control over the trust and the property within it. He or she can cancel or “revoke” the trust at any time after it is created. If the trust is revoked, all of the property within the trust will transfer back to the grantor. Typically, once the grantor passes away or loses competency the trust becomes irrevocable.
What is an Irrevocable Trust?
As opposed to a revocable trust, an irrevocable trust cannot be canceled or revoked by the grantor. Additionally, conditions within the trust cannot be modified or amended once the trust is created.
A trust can initially be written as an irrevocable trust, if the grantor wishes that to be the case, or a revocable trust can become an irrevocable one following the death or incompetency of the grantor. Like a revocable trust, an irrevocable one can also avoid probate and estate taxes.
Benefits to a Revocable Trust
In a revocable trust, the grantor maintains control over the assets and is able to move them as he or she sees fit. Many individuals are not quite emotionally ready to no longer have control over their assets and money. A revocable trust gives these people that reassurance that the grantor still has control.
However, the revocable trust does not protect these assets from creditors or potential lawsuits. In an irrevocable trust, these assets are taken out of the grantor’s control, which means legally the grantor does not have ownership of the assets, and provides for asset protection.
If avoid probate and also ensuring that his or her privacy is protected is important to the grantor, a revocable trust can be an excellent option.
Benefits to an Irrevocable Trust
Many grantors choose to write an irrevocable trust in an effort to protect assets. Not only are assets being transferred into the trust to avoid probate in an irrevocable trust, but they are also normally transferred into the trust in an effort to prepare for a long-term care crisis and estate tax planning.
For instance, if the grantor is anticipating that in a few short years, he or she will no longer have the mental capacity to make decisions on his or her own behalf and anticipates going into long-term nursing care, an irrevocable trust can be a wise decision.
Making the decision to no longer have full control over his or her property can be a tough one, and it is important that the grantor and the family speak with an estate-planning attorney to ensure that this is the best decision for all involved.
Contact Brian M. Douglas and Associates, LLC today
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