Estate planning can – and should – accomplish much more than simply deciding what happens to your estate assets when you are gone. A well thought out estate plan, for example, might also include additional goals such as incapacity planning, probate avoidance, and Medicaid planning, just to name a few. In order to accomplish the numerous and varied estate planning goals you may have, your estate plan will need to incorporate additional tools and strategies above and beyond a basic Last Will and Testament. One of the most commonly used estate planning tools is a trust agreement. A trust can help you accomplish a wide range of estate planning goals. If you are contemplating the addition of a trust to your estate plan, you will need to consider the benefits of revocable vs. irrevocable trusts.
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Trustor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. A trust beneficiary can be an individual, an entity (such as a charity), or even the family pet. Furthermore, a trust can be funded using just about any type of assets, including cash, securities, real and personal property, and even the proceeds of a life insurance policy.
Testamentary vs. Living Trusts
The first decision you must make when creating a trust is whether you need a testamentary or a living trust because all trusts are first divided into these two broad categories. A testamentary trust is one that the Trustor creates now; however, the trust is activated upon the death of the Settlor, usually by the Trustor’s Last Will and Testament. A living trust, as the name implies, is a trust that activates as soon as the formalities of creation are complete and funding is established.
Revocable vs. Irrevocable Trusts
Living trusts can then further be sub-divided into revocable and irrevocable living trusts. As the name implies, a revocable living trust can be modified or revoked at any time and for any reason by the Settlor whereas an irrevocable living trust cannot be modified or revoked by the Settlor for any reason once the trust is active. Testamentary trusts are always revocable trusts because they are usually activated by the Trustor’s Last Will and Testament at the time of the Trustor’s death and can, therefore, always be revoked up to that point in time.
How Do I Know Whether a Revocable or an Irrevocable Trust Is Right for My Estate Plan?
The only way to know with certainty whether a revocable or irrevocable trust is right for your estate plan is to consult with your North Dakota and Minnesota estate planning attorney. There are, however, some general considerations that may help you understand the benefits of each type of trust.
One of the most common uses of a revocable living trust, for example, is as an incapacity planning tool. When incapacity planning is the goal, you will appoint yourself as the Trustee. You then appoint the person you want to control your assets in the event of your incapacity as the successor Trustee. The majority of your assets are transferred into the trust and you continue to control those assets because you are the Trustee of the trust. In the event that you become incapacitated, your successor Trustee, chosen by you, will step in and take over as the Trustee. A revocable trust is also often used by parents with minor children who wish to safeguard the children’s inheritance given the fact that minors cannot inherit directly from a parent’s estate. Using a revocable trust makes sense because the trust is only used if needed.
An irrevocable trust is often best when asset protection is the goal. Because the Trustor loses a control over the assets that are transferred into an irrevocable living trust the moment they are transferred, the assets are outside of the reach of creditors. The assets are also not counted for purposes of Medicaid eligibility if help is needed covering nursing home costs. Finally, an irrevocable trust is also best if the goal is to provide supplemental care for a child with special needs because assets held in a special needs trust are also not counted when determining the individual’s eligibility for assistance programs such as Medicaid and SSI.
If you have additional questions about revocable vs. irrevocable trusts, contact the experienced estate planning attorneys at German Law Group by calling 701-738-0060 to schedule an appointment.
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