Trusts
The Crown Jewel of Estate Planning
By Daniel Khaldarov
When it comes to estate planning, trusts are a powerful tool that can be used in many different ways. Whether your goal is to avoid probate, protect assets, qualify for government benefits, or provide for your loved ones, trusts are an essential part of a well-rounded estate plan. This post will explore the different types of trusts—particularly revocable and irrevocable trusts—and discuss various ways they can be used, from probate avoidance to Medicaid planning and beyond.
What Is a Trust?
A trust is a legal arrangement where the settlor (sometimes referred to as trustor or grantor) transfers assets to a trustee, who holds and manages those assets for the benefit of one or more beneficiaries. The settlor decides how the trust will operate, and the trustee is legally obligated to follow these instructions. Trusts come in two main types: revocable and irrevocable.
Revocable Trusts
As the name suggests, a revocable trust can be changed or revoked at any time by the settlor during their lifetime. These trusts are flexible and are often used for estate planning to help avoid probate—a time-consuming and often costly court process used to settle an estate after death.
Benefits of a Revocable Trust:
- Avoids Probate: Assets held in a revocable trust bypass probate and are transferred directly to the beneficiaries according to the terms of the trust.
- Incapacity Protection: If the settlor becomes incapacitated, the trustee can step in to manage the trust assets without needing to go through court proceedings for guardianship.
- Privacy: Unlike a will, which becomes public record once it enters probate, a trust keeps your financial affairs private.
- Flexibility: You can change beneficiaries, update instructions, or revoke the trust entirely during your lifetime.
- Spendthrift protections: If desired, a revocable trust can be designed to protect a beneficiary by placing restrictions on when and how they are allowed to spend their inheritance.
However, revocable trusts do not protect assets from the settlor’s creditors or lawsuits, as the assets remain under the settlor’s control during their lifetime. Furthermore, since the assets remain in the settlor’s control, revocable trusts cannot be used to become eligible for Medicaid or any needs-based benefits.
Irrevocable Trusts
An irrevocable trust, on the other hand, cannot be easily changed or revoked once it’s established. When assets are transferred to an irrevocable trust, they are no longer considered the settlor’s property. This feature makes irrevocable trusts highly effective for asset protection. One of the uses for this type of trust is Medicaid planning, as well as special needs planning.
Benefits of an Irrevocable Trust:
- Asset Protection: Since the assets are no longer legally owned by the grantor, they are protected from creditors, lawsuits, and divorce settlements.
- Medicaid Eligibility: By transferring assets to an irrevocable trust, individuals may qualify for Medicaid without having to spend down all of their assets. This can be particularly helpful when planning for long-term care.
- Estate Tax Reduction: Irrevocable trusts can remove assets from your taxable estate, which may reduce estate taxes for larger estates.
- Special Needs Trusts: For individuals with special needs, an irrevocable trust can ensure that they receive financial support without jeopardizing eligibility for government benefits.
- Charitable Giving: Irrevocable trusts can be used to create charitable trusts, allowing you to donate assets to a charity while enjoying potential tax benefits during your lifetime.
Using Trusts to Avoid Probate
One of the most common reasons people choose to use a trust in their estate plan is to avoid probate. Probate is a public process that can take months or even years to complete, with legal fees often greatly reducing the inheritance left for beneficiaries. Assets held in a trust, whether revocable or irrevocable, pass directly to beneficiaries without the need for probate court approval.
Choosing the Right Trust for Your Needs
When it comes to trusts, one size doesn’t fit all. Whether you’re looking to avoid probate, qualify for Medicaid, protect assets, or provide for a special needs family member, your trust requires careful drafting by an estate planning attorney to comply with all relevant laws and fit your specific situation.
For many families, a revocable trust can provide flexibility and probate avoidance, while an irrevocable trust is essential for those needing asset protection or long-term care planning. Contact the Law Office of Daniel Khaldarov, and I will help you determine the best strategy for your individual goals.
