The most common kind of trust used in estate planning is a revocable living trust. You should, however, also consider another option that might be better suited for your needs and goals called an irrevocable trust. While these two kinds of trusts have some similarities in how they function, there are critical differences that determine which one would be best for you and your needs.
An irrevocable trust is one that, as its name suggests, cannot be changed in the future. Unlike a revocable trust, an irrevocable trust can't be amended or revoked by the grantor. With an irrevocable trust, the grantor, or person who creates the trust, cannot also serve as the trustee. This means that if you create an irrevocable trust, you cannot control and manage the assets you place in it or access them for your living expenses and other financial needs.
The benefit to this loss of control is that your creditors cannot access the trust's assets to satisfy their claim. When you have legal control over the assets in a trust, the court views them as available to you – and to your creditors. As a result, having control over the assets in a revocable trust can offer you greater flexibility and oversight, but it also means that you have less protection from others who might wish to go after your assets to satisfy a debt or legal judgment. It also means that these assets could be used against you for determining eligibility for government assistance, like Medicaid.
With both kinds of trusts, you can take advantage of added control over inheritance timing and use. By using either, you can direct when your beneficiaries receive their inheritance and exert some control over how they can use it. You can give your trustee discretion over when to make distributions and for which purposes like education, purchasing a house or starting a business.
They both allow you to avoid probate. This can save your family time, money and headaches that likely would come with probating a will.
Another key similarity between them is the privacy they offer for you and your loved ones. Probate is a public process, as the court proceedings are part of the public record. So, a will offers little to no privacy for your estate or your family. When you use a trust instead of a will, you avoid not only the hassle of probate, but you also prevent the details of your asset distribution from being available to everyone.
When is a revocable living trust the right choice?
A revocable trust may be the right choice when you:
- Want to retain lifetime control of assets
- Want to avoid probate
- Are not concerned with future lawsuits
- Want to keep affairs private
- Need asset protection for beneficiaries
- Own real estate in multiple states
- Want to control inheritance timing
- Have a beneficiary with special needs
When is an irrevocable living trust the right choice?
An irrevocable trust may be a better choice if you:
- Own non-residential property you want to keep in the family
- Are concerned about Medicaid eligibility
- Are concerned with future lawsuits (need asset protection)
- Need divorce protection
- Want to reduce estate taxes
- Plan to fund trust with assets not needed for living expenses