What Kind of Trust Is Right for You?

POSTED ON: November 9, 2021

Estate planning is a crucial part of any holistic financial plan, and financial advisors often work with estate planning attorneys for guidance in this area.

What Kind of Trust Is Right for You?

Everyone wins when estate planning attorneys, financial advisors and accounting professionals work together on a comprehensive estate plan. Each of these professionals can provide their insights when helping you make decisions in their area. Guiding you to the best possible 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 trusts accomplish? Trusts are not just for the wealthy. Many families use trusts 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 which can be right for clients. There are also many specialized trusts in each of the two categories: the revocable trust and the irrevocable trust. The first can be revoked or changed by the trust’s creator, known as the “grantor” or “settlor”.  The second can be difficult and in some instances and impossible to change, depending on the change that the settlor wants to make, without the consent of the trust’s beneficiaries.

There are pros and cons for each type of trust, any of whcih may be right for you.

Let’s start with the revocable trust, which is also referred to as a living trust. The grantor can make changes to the trust at any time, from removing assets or beneficiaries to shutting down the trust 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 trust’s assets until the trust documents direct the trustee to distribute assets. Some people use a revocable trust to prevent their children from accessing wealth too early in their lives, or to protect assets from spendthrift children with creditor problems.

Irrevocable trusts are just as they sound: the beneficiaries can’t be amended once established. Those terms of the trust cannot be changed, although often administrative provisons of the trust may be modified or amended.

Giving up control comes with the benefit that assets placed in the trust are no longer part of the grantor’s succession.  It can also mean that the assets are no longer subject to estate taxes depending on how the trust is established and the terms of the trust. Creditors, including nursing homes and Medicaid, are also prevented from accessing assets in an irrevocable trust.  Accordingly, an irrevocable trust may be just the right trust for clients wishing to qualify for Medicaid benefits.

Irrevocable trusts were once used by people in high-risk professions to protect their assets from lawsuits. Irrevocable trusts are used to divest assets from estates, so people can become eligible for Medicaid or veteran benefits.

The revocable trust protects the grantor’s wishes, if the grantor becomes incapacitated. It also avoids probate, since the trust becomes irrevocable upon death and 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 is not right for clients who need tax benefits or creditor protection while the grantor is living.

Depending on your goals and needs, your estate planning attorney will know which type of trust is best for your situation, and working with your financial advisor and accountant, they will be able to create the plan that minimizes taxes and maximizes wealth transfers for your heirs.

Read more about trusts in these articles:  How Do I Sell a Home in an Irrevocable Trust? and What Exactly is a Trust?

Reference: U.S. News & World Report (Aug. 26, 2021) “Choosing Between Revocable and Irrevocable Trusts”

BOOK A CALL with Ted Vicknair today to find out more about how you can plan your future for your and your family’s security.

Success Stories