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Clients often ask to have a trust prepared, not knowing the differences between a revocable trust and an irrevocable trust. One of the most important questions to ask oneself when undertaking trust planning is what your goals are. Are they to avoid probate, to protect assets from creditors, or to minimize or avoid estate taxes. You also need to ask yourself if you are comfortable giving up some control, the answer to which may depend on your age. The answers to these questions will determine which trust is best for you.
A common misunderstanding is that a revocable trust will protect your assets. That is absolutely not true. It will not protect your assets from creditors or taxes. The main purpose of the revocable trust is to avoid probate. It also provides a mechanism in case you become disabled, one that is a bit less complicated than using a power of attorney in the event of incapacity. With the revocable trust, the person creating the trust (the “grantor”) maintains complete control during his/her lifetime.
An irrevocable trust accomplishes the functions of the revocable trust, in avoiding probate and providing for incapacity. Unfortunately, by definition, once you create it and fund it with assets, you can not terminate the trust nor access the assets freely. You also can not easily change the terms of the trust. Usually, the trust can provide you with income, but with no ability to invade the principal of the trust. Since the trust does not permit the grantor to touch the principal of the trust, it serves the purpose of protecting the assets from creditors. It is most often done in order to protect one’s assets from long-term care costs. Done in advance, it will help to qualify you for Medicaid assistance and prevent you from spending all of your assets on your long-term care. The trust can be created so as to give the grantor some limited powers, thus providing some flexibility. It can also accomplish a myriad of tax advantages.
Choosing between a revocable trust and an irrevocable one is not easy. However, having all of the pros and cons explained to you in detailed by a knowledgeable attorney can assist you in making an informed decision.