There are a number of misconceptions that circulate about certain aspects of the estate planning process, and some of them are related to trusts. One of these notions is the idea that you cannot change your mind and dissolve a trust once it has been created.
In this post, we will provide clarity so you can go forward with a more complete understanding of the subject.
The idea that a trust cannot be revoked is a partial truth. There are irrevocable trusts, but there is also the revocable living trust. Why would you use a trust that you cannot revoke if you have a safer option?
In the legal realm, there is a concept called “incidents of ownership.” If you establish an irrevocable trust, you cannot act as the trustee, so you would relinquish personal control of the assets.
You would be surrendering incidents of ownership, and this can be beneficial when certain circumstances exist. For example, the portion of an estate that exceeds $11.7 million is subject to the federal estate tax and its 40 percent top rate.
Assets that are held by an irrevocable trust would not be counted for estate tax purposes, and tax efficiency trusts facilitate transfers at a tax discount.
Clearly, a small percentage of families are exposed to this tax, but there is another application that can be useful for people of ordinary means. Most senior citizens will need long-term care, and Medicare will not pay for a stay in a nursing home.
Medicaid will cover these costs if you can gain eligibility, but it is a need-based program. You cannot qualify if you have more than $2000 in countable assets in your name.
If you convey assets into an irrevocable income-only Medicaid trust, you could receive distributions of the trust’s earnings. The assets would not count if you apply for Medicaid to pay for long-term care as long as you fund the trust at least five years in advance.
These are a couple of the reasons why a person may want to use an irrevocable trust, but there are others.
Changing an Irrevocable Trust
Generally speaking, you cannot change an irrevocable trust, but there are some exceptions. Some irrevocable trusts allow for modifications under very limited, specific circumstances.
It is also possible to give the trustee or the beneficiaries a lifetime power of appointment that would allow for changes.
An irrevocable trust could include a provision that would allow for an independent trust protector to consider proposed changes to the terms.
Revocable Living Trust
The other type of trust is the revocable living trust. As the name would indicate, you can dissolve this type of trust, and it becomes active when you are still living. As the grantor of the trust, you would act as the trustee, so you would have total control of the assets every step of the way.
However, they would count if you apply for Medicaid, and assets in the trust would be part of your taxable estate.
What are the benefits? If you use a will to state your final wishes, it would be admitted to probate, which is a costly and time-consuming legal process. The probate court is not involved when assets are being distributed through the terms of a living trust.
You could include divorce and spendthrift protections for the beneficiaries when you have a living trust, and you can name a disability trustee to administer the trust in the event of your incapacity.
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