When people ask questions about trusts, they sometimes proceed with the understanding that there is only one type of trust. In reality, there are different types of trusts, and they serve varying different purposes. As a result, what is true of one trust may not be true of the next.
The major distinction between the classes of trusts is the matter of revocation. Some trusts are revocable, and there are also irrevocable trusts. Let’s look at the differences beyond the obvious.
Revocable Living Trusts
It doesn’t take a legal expert to immediately understand that you can in fact revoke or dissolve one type of trust, and you cannot revoke the other. With a revocable living trust, you can change your mind and dissolve the trust at any time.
On this level, you do maintain control of the assets that you convey into the trust. However, the control does not stop with the power of revocation.
You will probably never want to dissolve the trust, because you would be creating it as an estate planning vehicle. However, you can act as the trustee while you are alive and fully capable of making sound decisions. You can also act as the beneficiary at first.
To get assets into the hands of loved ones after you are gone, you name successors to assume these roles after your passing. In the trust declaration, you leave behind instructions that the trustee would follow with regard to asset distributions to the beneficiaries.
These distributions would not be subject to the process of probate, and this is one of the major reasons why people use revocable living trusts. This process is time-consuming, and it can be expensive.
You would use an irrevocable trust of some kind to satisfy objectives that would not be satisfied if you were to use a revocable trust. Since you cannot revoke the trust, you are surrendering incidents of ownership.
As a result, assets in this type of trust could be protected from legal judgments. You would also be removing the assets from your estate for tax purposes if you convey them into an irrevocable trust.
In a sense, you do surrender control of assets in this type of trust to some extent, but there is more to the story. For example, if you were to convey your home into an irrevocable qualified personal residence trust, you could continue to live in the home as usual for a period of time that you determine.
If you create an irrevocable Medicaid trust so that you can qualify for Medicaid to pay for long-term care as an elder, you could receive income from the trust’s earnings. You could also receive income if you were to create an irrevocable charitable remainder trust.
We have provided some basic information in this brief blog post. Contact us if you have questions about how you can use a trust of some kind to effectively realize your estate planning goals.