A revocable living trust enables you to keep control of the assets you’ve put in the trust, but in certain cases, an irrevocable living trust is the best alternative.
Living trusts are often used in the estate planning process. Living trusts are classified into two types: revocable and irrevocable. It’s critical to understand the distinctions between living trusts before deciding which one is appropriate for your specific situation.
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What Exactly Is a Living Trust?
A living trust is one that you establish throughout your lifetime. A living trust’s objective is to keep your assets while you’re alive and distribute them according to your intentions when you die.
In contrast, a testamentary trust is not established until after your death. While you provide all of the trust’s terms in your will, the testamentary trust is not formed until you execute your will. It is only after your death that the trust is established.
Terminology of Trust
Certain terminology are used by all trusts and should be familiarised with. The grantor or settlor is the person who establishes a trust. The beneficiaries are the persons to whom the trust’s assets will be allocated upon your death.
Finally, the trustee is the person in charge of operating the trust and distributing the funds. If you’ve also selected another trustee to take over if the first trustee becomes incapacitated, this second trustee is known as the successor trustee.
Revocable Living Trusts (RLTs)
The revocable living trust, as the name implies, is one that you may revoke or terminate at any moment. The word “revocable” refers to more than merely the capacity to cancel the trust. The revocable living trust allows you to keep control of your assets even while the trust owns them.
You may do the following as the grantor of a revocable living trust:
Change any of the trust terms
Move assets into and out of the trust.
Change your beneficiary(ies), trustee(s), and replacement trustee(s).
Furthermore, while establishing a revocable living trust, many persons name themselves as trustee. A revocable living trust also has the following advantages:
Probate is avoided. Because the trust controls the trust assets, they are not subject to the probate procedure upon your death.
Increasing privacy. Assets during the probate procedure are open to the public. By maintaining your assets in trust, you retain control over those assets and how they are distributed.
Because of your incapacity. A living trust allows you to name someone to take over if you become incompetent, either mentally or physically, and are unable to administer the trust.
Living Trust (Irrevocable)
The irrevocable living trust serves the same purpose as its name suggests. Because it is irreversible, once you create an irrevocable living trust, you lose the power to do anything with it. You are not only unable to terminate or cancel it, but you are also unable to make any modifications to the trust.
The irrevocable living trust is less common in the estate planning process due to its lack of flexibility. Its biggest downside is its irrevocability: once assets are transferred to the trust, you no longer have control over those assets.
However, there are certain scenarios in which an irrevocable trust makes sense, such as the following:
Estate taxes should be reduced. Certain irrevocable trusts may assist you in reducing or eliminating estate taxes. Because the laws for these trusts may be complicated, it’s always a good idea to check with an attorney if you want to avoid estate taxes with your irrevocable living trust.
Eligibility for Medicaid. A government programme, such as Medicaid, often has particular eligibility criteria that establish eligibility for the help in issue. Your beneficiaries are less likely to have their income or asset eligibility levels changed by the trust if you make it irrevocable.
Creditor defence. Because it cannot be cancelled once established, an irrevocable trust provides more creditor protection to both the settlor and the trust’s beneficiaries than a revocable trust. If creditor protection is one of your goals, you should think about creating an irrevocable trust.
The flexibility of the revocable living trust is a suitable choice for most estate planning objectives since it allows you to keep control over the assets you’ve put in the trust.
However, depending on your individual circumstances or goals, an irrevocable living trust may be the superior option. However, whether you choose a revocable or irrevocable living trust, it is always a good idea to speak with an expert estate planning attorney to assist you set up your preferred living trust strategy.