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 and the costs of a nursing home.
There are two basic kinds of trust. 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.” The second is difficult and may not be possible to change without the consent of all the trust’s beneficiaries.
There are pros and cons for each type of trust.
Let’s start with the revocable 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 avoid probate. Some people use subtrusts within 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: they generally can’t be amended or revoked once established. The terms of the trust cannot be changed, and the grantor gives up any control or legal right to the assets held in the trust. Giving up control comes with the benefit that assets placed in the trust are no longer part of the grantor’s estate and can avoid estate taxes. Creditors and Medicaid are also generally prevented from accessing assets in an irrevocable trust.
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 probate estate. However, there are drawbacks. The revocable trust does not provide tax benefits or creditor protection while the grantor is living.
The estate planning attorneys at Kurre Schneps LLP can guide you on which type of trust is best for your situation, and work with your financial advisor and accountant, to create a plan that minimizes taxes and maximizes wealth transfers for your heirs.
Reference: U.S. News & World Report (Aug. 26, 2021) “Choosing Between Revocable and Irrevocable Trusts”
