Understanding how trusts work is a key factor in your estate planning process. Trusts can be a vital part of protecting your assets while ensuring that your needs are covered while you age, and that those you leave behind are cared for when you’re gone.
There are, however, two different kinds of trust, and each has its own qualities, benefits, drawbacks and uses. You’ll need to pick the right one to make sure your estate plan is established properly. Discover the difference between a revocable trust vs an irrevocable trust, how each is used, and how to choose the right kind of trust for your family.
The Revocable Trust
The revocable trust, also called a living trust or revocable living trust, is a trust that you can make changes to whenever you need. This means that after it’s set up, if you have second thoughts, you can amend it. If, for example, you include a spouse in the trust, but your marriage dissolves and you want to remove them, you can.
You can also cancel a revocable trust entirely, or change the contents wholesale via an amendment and restatement of the trust. Because these trusts are so malleable, the assets placed into them are still considered yours. That means that when estate taxes and creditors come calling, the assets of the trust are fair game. If you’re sued, a creditor can come after it. When you make Medicaid plans, your trust’s assets will count.
Irrevocable Trusts
An irrevocable trust, on the other hand, is essentially set in stone. Once the trust has been signed, it can’t be changed except under very specific circumstances. In some cases, a living trust can be established in such a way that when the trust maker dies, or when some other specific condition is met, it becomes irrevocable. Indeed, a typical revocable living trust becomes irrevocable upon the trust maker’s death, and it can be established to break into separate irrevocable trusts at this time.
When Each Kind is Used
Revocable living trusts are generally used for three reasons. The first is to avoid probate court. Those assets held in a revocable trust when you pass on will automatically pass to the named beneficiaries outside of the probate process. The second is to prepare for mental disability. If you become mentally incapacitated, your trustee can manage the funds on your behalf.
Finally, revocable living trusts protect property privacy after you die. A trust agreement is a private document and cannot become public record, unlike a will, which is entered into court records.
Irrevocable trusts are generally used to place assets outside of estate taxes and to protect them against lawsuits, creditors and other liabilities. The assets become the property of the trust, and not the trust maker, and so are protected. Finally, they’re often used to establish charitable planning with your estate.
Getting Help with Trusts and Estate Planning
If you’re still confused about how trusts work or which kind is right for your family, don’t worry; you’re not alone. Proper estate planning requires help from a knowledgeable Montana trusts lawyer like Tanko Law. Read some more about us, and get in touch for a consultation today.