Trusts are highly useful tools for protecting your property during your lifetime and beyond. They can also be adapted to many purposes. That said, the extent of their protection and their adaptability depends upon the type of trust you choose.
For trusts that go into effect during your lifetime, there are two main options: revocable and irrevocable. In this blog post, we will go over the basics of these two types and why you might wish to choose one over the other. But first, we should briefly explain how a trust works.
The basics of trusts
Put simply, a trust is a way of dividing ownership. A person who starts a trust is known as the grantor. The grantor puts assets into the ownership of a trust, where they are managed by a person (or business entity) known as a trustee. The trustee has a legal responsibility to competently manage the assets for the benefits of the grantor’s named beneficiaries.
One of the great advantages of this arrangement is that it allows the grantor’s assets to avoid the probate process after the grantor dies. However, a trust can also be advantageous during the grantor’s lifetime.
If you set up a so-called living trust, you can name yourself as the beneficiary and your loved ones as your successor beneficiaries. You may even name yourself as the trustee, with a trusted friend or professional as your successor trustee.
Advantages of revocable trusts
When you first set up your trust, you must consider how much control you want over the arrangement. A lot can change in your life after the ink dries on your trust documents, and after a few years, you may find that you want to move assets into or out of the trust, change the organization of the trust or dissolve it altogether. If your trust is considered irrevocable, you cannot do that.
For that reason, many grantors set up their living trusts to be revocable.
Advantages of irrevocable trusts
As the name suggests, it is not easy to change an irrevocable trust. However, when it comes to asset protection, irrevocable trusts are superior to revocable trusts.
Because you, as the grantor, retain control over the assets in a revocable trust, the assets are not protected from your creditors. If your estate is large enough, they may also be subject to the federal estate tax. (Indiana does not have an estate tax.) This is not the case with an irrevocable trust. It is very hard for creditors or the IRS to access the assets held in an irrevocable trust.
Another advantage of choosing an irrevocable trust is that, but ceding ownership of your assets to the trust, you can maintain eligibility for Medicaid and other programs you may need to pay for long-term care, should you need it — and many Americans do.