If you are thinking about setting up a trust for your family, it is critical to choose the type of trust that works best for you. There are two basic types of trusts: revocable and irrevocable. Each type has its benefits and drawbacks, so it is important to work with an estate planning attorney to pick the trust that fits your needs.
What is a Revocable Trust?
The creator (“grantor”) of a revocable trust can change the terms of the trust at any time and as many times as he wants. He can add or remove beneficiaries, add or remove assets, or modify how the trust assets are managed. The grantor can even revoke or terminate the entire trust. When the grantor dies, a revocable trust immediately becomes an irrevocable trust.
What are the Benefits of a Revocable Trust?
- The ability to be able to change your mind if circumstances change is the primary benefit of a revocable trust. Life circumstances change, and a revocable trust allows you to adapt to those changes.
- Plan for mental incapacity. A revocable trust allows you to plan for mental incapacity, either from a trauma, like a stroke, or a degenerative condition, such as Alzheimer’s. In a revocable trust, you can name a successor to manage your trust assets if you become unable to make financial decisions for yourself. The successor trustee will have the ability to immediately handle your assets without having to ask a judge to appoint someone as “conservator” or “guardian.” The revocable trust can include specific steps and guidelines that the successor trustee must follow.
- Avoid probate. The property held in a revocable trust avoids probate and passes directly to the named beneficiaries at the time of your death. This allows your family to avoid the time, cost, and stress of probate. Additionally, the revocable trust will remain private. Whereas, if you go through probate, the contents of your estate become public record.
What are the Negatives of a Revocable Trust?
- Estate tax implications. When you create a revocable trust, you are still considered to have ownership over the trust property. Therefore, your estate may have to pay a federal estate tax on the property at the time of your death. For many individuals, this is not a concern because they fall below the exemption. As of 2020, the federal estate tax exemption was $11.58 million.
- At-risk from creditors. Creditors can reach the property in a revocable trust. If you are sued, your trust assets are at risk, just as if you still owned the property in your name.
- Potential disqualification from public benefits. The property in a revocable trust is counted towards the asset limit for government benefits, such as Medicaid.
What is an Irrevocable Trust?
The terms of an irrevocable trust cannot be changed or terminated by the grantor. It is set in stone from the minute you create the trust. You give up complete control to the individual that you named as trustee. This means that you cannot take back any property that you have placed in the trust or play a role in managing the trust assets.
What are the Benefits of Irrevocable Trust?
- No estate tax. Because you have no control over the property in an irrevocable trust, you are not considered to be the owner, and it is not included in your estate at the time of your death. Therefore, there is no estate tax due on the trust property.
- Asset protection. Property in an irrevocable trust cannot be reached by your creditors or in a lawsuit. If you are sued, the assets in the irrevocable trust can be used to satisfy any judgment against you. You must set up the trust before any creditor issues arise, or the transfer of property to the trust may be considered a fraudulent conveyance.
- No effect on government benefits. Property in an irrevocable trust is not counted towards the asset limit when determining eligibility for government benefits, like Medicaid. However, there is a 5-year look-back rule, where the value of any property given away within the last five years will be counted towards the Medicaid asset limit.
What the Negatives of an Irrevocable Trust?
The major drawback of an irrevocable trust is the lack of flexibility. If your life circumstances or wishes change, you will not be able to modify or terminate the trust.
Your Phoenix Estate Planning Attorney
If you are interested in creating or updating your estate plan, you should consult with an experienced estate planning attorney who understands Arizona’s unique laws and regulations. Nicole Pavlik has successfully helped many residents of Phoenix navigate the estate planning process and is ready to offer you the advice you need. Call Nicole Pavlik Law Firm today at 602-635-6176 to schedule a consultation.