Before you specify what type of trust you want to open, you must first decide if you wish to set up a revocable or an irrevocable trust. An irrevocable trust offers several benefits, but it is not the right type of trust for everyone. Both a revocable and an irrevocable trust follow the definition of a trust, which represents the legal relationships between a grantor, trustee, and beneficiary. The grantor of a trust authorizes the trustee to manage the trust's assets following the terms and conditions that are written into the trust. As the third party involved with a trust, the beneficiaries receive hard assets and the income generated from soft assets.
What is the Difference Between an Irrevocable and a Revocable Trust
It is all about control when differentiating between an irrevocable and a revocable trust. An irrevocable trust prohibits the grantor from changing any of the terms and conditions after creating the trust. For a revocable trust, the grantor can change the terms and conditions of the trust at any time.
Why Would You Want an Irrevocable Trust?
When you decide to create an irrevocable trust, you must make a firm financial commitment before placing any assets in the trust. Loss of control makes an irrevocable trust unsuitable for some people. However, this type of trust delivers several benefits.
Protection Against Creditors and Legal Judgments
Establishing an irrevocable trust represents the most effective strategy for shielding your assets from creditors and legal judgments. Business owners benefit from shielded assets because they can go out of business if a creditor or a legal judgment swallows all their assets. If you are a business owner, you can shield land, equipment, and inventory in an irrevocable trust. Attorneys and physicians also benefit from setting up an irrevocable trust because a legal judgment cannot take away their assets.
Lower Estate Taxes
Two specialized irrevocable trusts can lower the amount of money you pay in estate taxes. An irrevocable life insurance trust might help you avoid paying estate taxes when you die. A grantor retained annuity trust provides the grantor with a steady stream of income for many years and transfers some of the principal investment to family members free of estate taxes.
Qualify for Federal Government Programs
Americans that receive Medicaid or Social Security disability benefits must meet strict income and asset limitations. If the value of your assets exceeds a designated amount of money, you lose financial assistance from both programs, as well as several other programs run by the federal government. Medicaid places a very stringent limit on the value of the assets you can own. By establishing a Medicaid Asset Protection Trust (MAPT), you transfer enough assets to fall under the asset value limit set by Medicaid. The trustee of a MAPT cannot be the grantor of the trust.
How Do I Create an Irrevocable Trust
Because the terms and conditions that you establish for an irrevocable trust remain in effect for the life of the trust, you should work with a highly skilled estate planning attorney who has considerable experience helping clients set up irrevocable trusts. An attorney can help you choose the right trustee to manage the trust and write the most effective terms and conditions that apply to the distribution of assets to your beneficiaries.
An estate planning attorney helps you submit the proper documents and advises you on which state is the best state for creating an irrevocable trust.
Learn more about setting up an irrevocable trust by scheduling a free case evaluation with one of the experienced estate planning lawyers at Cloud Peak Law Group.