What is a revocable trust?
A revocable trust, also known as a living trust, is a trust which can be modified or terminated at any time. You can remove or add beneficiaries or change how your assets are to be managed. A revocable trust is a good tool to use if you would like someone to be named over your assets when you are not able to act any further. They are commonly used for those who have property in multiple states. Revocable trusts are private and confidential, and are typically used in addition to a Last Will and Testament. The assets in your revocable trust are typically under your social security number and are included in your estate.
Here are some real-world examples of good uses for a revocable trust:
You set up a revocable trust naming your friend as trustee. Several years down the road you are hospitalized. As trustee, the friend can step in and pay all your health care expenses and take care of your home and other finances while you are incapacitated.
You establish a revocable trust for most of your assets. Upon your passing, these assets are transitioned to the correct beneficiaries more quickly than via an estate. You avoid probate (if all assets are titled correctly), and everything is kept confidential.
How is an irrevocable trust different?
Irrevocable trusts generally cannot be modified or changed once they are completed. They can be created and funded during your lifetime or at death. Typically, irrevocable trusts are created for asset protection and control from the person establishing the trust (called the grantor). The assets included in the irrevocable trust are typically not included in the grantor’s estate.
Here are some real-world examples of good uses for an irrevocable trust:
You set up an irrevocable trust in your Last Will and Testament and name your spouse and children as beneficiaries. Upon your passing, the trust is established, and you will have specified how and when the beneficiaries receive the assets. Many individuals do this to provide an income stream for their children over the lifetime of the trust, which is often appreciated.
You are divorced and remarried and have children from your first marriage. You set up a trust in your Will that benefits your current spouse and then, upon his or her passing, your assets go to your children. This is called a Qualified Terminable Interest Property Trust (QTIP).
Other common types of irrevocable trusts include:
- Irrevocable Life Insurance Trust (ILIT) – This contains one or more life insurance policies and are set up during your lifetime.
- Grantor Annuity Trust (GRAT) – This is set up during your lifetime and allows you to contribute assets to the trust and receive an annuity payment over time. After that period, the assets return to your beneficiaries tax-free.
- Charitable Remainder Trust (CRAT/CRUT) and Charitable Lead Trust (CLT) – These are trusts in which a charity is the ultimate beneficiary and are set up during your lifetime. A Charitable Remainder Trust pays you a payment over your lifetime and whatever is remaining at the end of the term pays out to charity. A Charitable Lead Trust pays the charity first and whatever is remaining is then paid to your beneficiaries.
- Special Needs Trust (SNT) – This is a trust established and designed to care for a disabled beneficiary and can be set up during your lifetime or at death. It is meant to supplement Social Security Disability and other forms of aid.
- Medicaid Asset Protection Trust (MAPT) – This trust protects a Medicaid applicant’s assets from being counted for Medicaid eligibility purposes. It enables someone who would otherwise be ineligible for Medicaid to become Medicaid eligible and receive the care they require at home or in a nursing home.
We hope this series has shed some light on what can be a confusing area of financial planning. All of the above trusts can be complicated and should be discussed with your attorney and other financial advisors to ensure that they are set up correctly, once you’ve determined that a trust is right for you.
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