People who seek the services of an estate planning attorney know generally about the options before them, but many get stuck on the way irrevocable and revocable trusts work. Understanding the differences can impact your estate planning decisions.
An experienced estate planning attorney will help you understand how each might work for you, considering your goals, assets, and the amount of control you want to have over your estate. Tailoring a plan to your family’s specific situation is an essential part of planning that could call for one or both types of trusts.
Understanding the Role of Trusts in Estate Planning
When a person plans their estate in advance, they have opportunities to include details about who inherits from the estate, how much they inherit, and when they inherit. Those who don’t plan and die without a will are sent to probate court to settle their estate according to Illinois laws. This could result in an estranged spouse receiving half of your assets while a stepchild who wasn’t adopted receives nothing.
Trusts are legal vehicles that are given ownership of your assets. Properties and business interests can be assigned to trusts, with beneficiaries receiving lump sum payments or planned payouts over time after your death. But there are significant differences to understand:
- Revocable trusts, also called living trusts, are the more commonly used version. They allow the grantor to make adjustments, use assets it contains, or cancel the entire trust during their lifetime.
- Irrevocable trusts are permanent and require a court order to amend once they are established. Trustees are named to manage the trust, which can include real property, retirement accounts, and business interests, among other assets.
Both types of trusts help estates avoid the time and expense of probate. That is the process administered by state court which oversees the disposition of estates, whether or not a will is involved. The probate process is not private, making much of the personal information available to the public.
Advantages and Disadvantages of Each Type of Trust
Revocable living trusts avoid probate, provide for minor children, and can be used to manage payouts to beneficiaries who may not be ready to manage lump sum inheritances.
Young families benefit most from revocable trusts because they provide flexibility for changing with a family’s educational needs, dynamics, and finances.
The downside of a revocable trust is that its contents can be claimed by creditors. Because the assets remain in the grantor’s name and usable by them, creditors may make claims to collect from the living trust. Contents of a revocable trust are also not excluded from the grantor’s taxable estate.
Irrevocable trusts cannot be changed without court approval or the consent of all parties involved. By creating an irrevocable trust, the grantor is giving up ownership of accounts and assets it contains. However, that legal shield is helpful because it excludes the contents from the grantor’s taxable estate as well as shielding those assets from creditors.
Illinois estate planning attorneys often recommend irrevocable trusts to circumvent the state’s significant estate tax, which taxes estates valued at $4 million or more. Types of irrevocable trusts that can shield assets from this tax include irrevocable Life Insurance Trusts (ILITS), Grantor Retained Annuity Trusts (GRATs), and Spousal Lifetime Access Trusts (SLATs).
Special Circumstances for Irrevocable Trusts
Irrevocable trusts are most valuable when seeking to qualify for Medicaid. Specifically, a Medicaid Asset Protection Trust can be created to shield assets from counting against Medicaid eligibility as long as it clears the mandatory five-year lookback period.
Special needs planning often entails an irrevocable trust because assets can be paid out in installments, allowing a person reliant on Supplemental Security Income (SSI) to retain those benefits. Still, a trust can support the individual’s educational, medical, and personal expenses.
How to Use Revocable and Irrevocable Trusts
An experienced estate planning attorney from Legacy & Life Law Firm can guide you to the right type or combination of trusts that fits your circumstances and family needs. Revocable and irrevocable trusts are not mutually exclusive; some people may have one of each. Call for a comprehensive analysis of your estate today.