Trusts are key components of a comprehensive estate plan that offer a number of potential benefits. Two of the most common types of trusts used in estate planning are revocable and irrevocable trusts. There are advantages and disadvantages to both, and deciding which one is right for your unique plan will require consultation with an experienced Florida estate planning attorney. Verras Law is ready to serve you.
The Basics of Trusts
A trust is a legal arrangement by which assets are managed by a trustee for the benefit of third parties known as beneficiaries. Contrary to popular belief, trusts are not reserved for the wealthy. In fact, anyone can use these instruments to potentially avoid the expensive and time-consuming probate process, save on estate taxes, and provide a means of financially supporting one’s family.
Living trusts, also known as inter vivos trusts, are established during the lifetime of the settlor (the person who creates the trust) and are used immediately to accomplish the above and other estate planning objectives. The two main types of living trusts are revocable and irrevocable trusts.
The Benefits and Drawbacks of Revocable Trusts
As the name implies, a revocable trust is one that can be modified or revoked by the settlor. Assets can continue to be transferred into or out of the trust, so the settlor retains access and control of the trust property. In many cases, the settlor and trustee are the same individual. Some advantages of this type of trust are:
- Incapacity planning: The primary reason to form a revocable trust is to ensure that assets will be properly managed in the event of the settlor’s incapacity.
- Avoiding probate: Skipping the costly and lengthy probate process is another reason to use a revocable trust in passing property to beneficiaries.
- Flexibility: Since the terms of the trust can be modified and the trust can be dissolved, the revocable trust is flexible and adaptable to changing life situations like remarriage.
These are a few drawbacks of revocable trusts:
- No protection from creditors: Since trust assets are still considered to be owned by the settlor, they are not protected from creditor claims.
- No immediate tax benefits: There are no significant tax advantages to creating a revocable trust since assets (and the income they generate) are owned by the settlor.
- No Medicaid advantages: Most assets held in a revocable trust will be counted against the settlor when determining eligibility for Medicaid.
The Benefits and Drawbacks of Irrevocable Trusts
An irrevocable trust cannot be modified or dissolved after it has been created. Once assets are transferred into the trust, they are no longer considered the settlor’s property. Like a revocable trust, an irrevocable trust can avoid probate in distributing assets to heirs. Other benefits of the irrevocable trust include:
- Shielding assets: Because irrevocable trust assets are no longer viewed as the settlor’s property, they are protected from creditor claims and lawsuits.
- Medicaid eligibility: For the same reason, an individual can exempt assets from being counted against them for purposes of Medicaid eligibility.
- Indirect control of assets: Although the settlor no longer owns the trust property, by selecting a desired trustee and drafting favorable terms, he or she can exercise a limited amount of indirect control over the assets.
These are some reasons to be cautious about irrevocable trusts:
- Cannot be modified or revoked: Except in extreme cases, the irrevocable trust cannot be changed or dissolved, so the settlor loses ownership of the assets.
- No flexibility: The inability to modify or dissolve the irrevocable trust means that it is not adaptable to changing life circumstances.
- Potential tax implications: Depending on how it is drafted, the irrevocable trust may incur a significant tax rate on income.
Let Us Review Your Estate Planning Options
Because of the pros and cons of revocable and irrevocable trusts, it is important that you speak with a qualified estate planning attorney before deciding on one or the other. Our team can review your specific estate planning goals and then craft a personalized strategy that may include either type of trust. Get started by calling Verras Law today.