Why Do You Need a Revocable Trust?

Why Do You Need an Irrevocable or Revocable Trust?

As we’ve often said about estate planning, trusts are not just for the rich and famous. You don’t need to be wealthy to benefit from a trust. Many of our clients use trusts for asset protection from nursing homes, taking care of special needs children, and more. Below we’ll discuss the differences between a revocable trust, irrevocable trust, and testamentary trust.

What is a Trust?

A trust is basically a legal document that puts certain assets in a “bucket” so to speak. There are different kinds of trusts which we’ll discuss below. You can create a trust during your lifetime and those are called “intervivos” trusts. You can also have a trust that’s created after your death. Those are called “testamentary” trusts. Testamentary trusts are usually created under a will and determine who gets your property, when they get it, and how they get it.

Revocable Trusts

There are two basic types of intervivo trusts that can be created during your lifetime — revocable and irrevocable trusts. Many folks use the term “living trust” to refer to a revocable trust. This is a trust that you create during your lifetime and you have 100% control of the assets in it.

When you create a revocable trust, you sign the legal documents saying you are the “grantor.” This means that you are the person that created the trust. Your trust will also have a trustee. This is the person in charge of the trust once it is created. As a general rule, the grantor is the trustee of a revocable trust because that person wants to have full control of the assets within the revocable trust.

You can put many different things inside this type of trust. You can put land, a house, stocks, cash, etc., in it. During your lifetime as the grantor and trustee, you can remove anything you want from the trust. If you want to remove money from the trust to make a purchase, you can do that as you wish.

Why would you want to use a revocable trust as a part of your estate planning? Well for one, this type of trust avoids probate. Whatever you put in that living trust is not subject to probate when you die. Upon your passing, your successor trustee will continue to manage the property and distribute the assets in accordance with the written document. The revocable trust also avoids a conservatorship if you were to become incapacitated.

Some people don’t want to remove anything from their trust and simply use it to avoid probate and conservatorship. In this case they usually turn over the trust to a professional manager. But if the situation arises where the grantor of the trust needs money or assets from the trust, they can still remove them as they wish. Upon your death, the trust becomes irrevocable and it can’t be changed.

Irrevocable Trusts

An irrevocable trust is another type of intervivo trust that you setup during your lifetime. But unlike a revocable trust that can be changed or used to withdraw funds, an irrevocable trust cannot be changed. When drafting an irrevocable trust, you’ll list your lifetime beneficiaries (often times your children) and the contents of the trust will be distributed to them upon your death.

Now you may be wondering why someone would create an irrevocable trust if you can’t touch the assets in it? Irrevocable trusts are a great tool for asset protection. If you’re thinking you’ll need nursing home care in the future, irrevocable trusts prevent the nursing home from spending all your assets. The irrevocable trust allows you shelter those assets so that you can qualify for Medicaid and not spend your life savings on nursing home care.

But what if you suddenly need income from this irrevocable trust? There are ways to draw income from the assets in the trust for your benefit. If you don’t ever need to draw income from the irrevocable trust, that income would just accumulate inside the trust and pass to your beneficiaries upon your death.

We draft many irrevocable trusts every year for asset protection. Our clients aren’t necessarily concerned with estate taxes because the unified credit is so high now. But they are concerned about the potential of an $8,000 to $10,000 a month nursing home bill. If they didn’t have an irrevocable trust, they’d have to spend down their assets to qualify for Medicaid. But with the trust, we can protect their assets so they can be safely passed to their heirs.

Testamentary Trusts

Revocable and irrevocable trusts are types of “intervivo” or living trusts. Now let’s talk about “after death” trusts, also known as testamentary trusts. Testamentary trusts are helpful if you have a special needs child or younger children that are not responsible with money.

The testamentary trust states that the shares of the special needs child will be held in the trust for their benefit and can be used to pay their extra or supplemental needs. We don’t want a sudden influx of assets interfering with government benefits that this special needs individual may already be receiving.

Testamentary trusts are also helpful if you have a child that is known to be a spendthrift. You can create a “general needs trust” that will reduce the likelihood that your children become trust fund babies. Many clients will put qualifiers in their trust that requires a child or beneficiary to have a job and be a functioning member of society. As long as they meet those qualifiers, they will receive assets from the trust. But the trustee has the discretion to withhold those assets if the beneficiary doesn’t meet the qualifiers listed in the trust.

A testamentary trust is also frequently used for individuals that have children under 25. They put the assets inside a general needs trust for the benefit of the child when he or she reaches a certain age. When they reach that age, the trust can then start paying them income monthly or quarterly for their health, maintenance, support, or education.

Contact Us So We Can Help!

To recap, there are two types of lifetime or intervivo trusts — revocable and irrevocable. The revocable trust has the lid off the bucket and the irrevocable trust has the lid on the bucket. The revocable trust is subject to creditors like the nursing home. The irrevocable trust protects your assets from the nursing home. Then we have the after death trusts or testamentary trusts that include special needs and general needs trusts.

If you need assistance with creating a trust or other estate planning needs, you can complete this form or give us a call at (229) 226-8183. If you’d like to see this blog in video format, you can watch it below. Please be sure to SUBSCRIBE to our YouTube channel and click the bell notification button so that you’re notified each time we publish a new video.