It can be challenging to understand your options when it comes to Trusts. One of the key factors to determine is whether to create a Trust that is revocable or irrevocable. In this article, we explain the difference between the two types of Trusts.
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Revocable vs. Irrevocable Trusts in Massachusetts
Different Types of Trusts
There are several reasons why you might decide to establish a trust. Accordingly, there are many types of trusts, each created to meet specific planning goals. It helps to understand the parties to a Trust, namely the Grantor, Trustee, and Beneficiary, as well as the two broad categories of trusts, Revocable and Irrevocable. In this article, we explain the role of each party and the difference between a Revocable and Irrevocable Trust.
Parties to a Trust
Trusts are legal entities and use specific language to identify the parties. Knowing the three parties and their roles will help you understand the difference between types of trusts.
Grantor: The person who establishes the Trust and transfers assets into it, also referred to as the Settlor, Donor, Trustor.
Trustee: The person or entity responsible for managing the Trust assets according to the wishes of the Grantor. The Trustee has the legal capacity to act on behalf of the Trust.
Beneficiary: The Trust beneficiaries are entitled to receive Trust assets based on how the Grantor directs the Trustee to distribute the assets.
Revocable vs. Irrevocable Trusts
Revocable and Irrevocable Trusts are common components of estate plans. While Trusts serve a variety of purposes, the decision to use one type of trust over the other is rooted in the specific goal you wish to achieve.
The Key Difference Between Revocable and Irrevocable Trusts
Revocable Trusts are also known as Living Trusts, Revocable Living Trusts, or Inter Vivos Trusts. The Grantor can change the terms of the trust or “revoke” or dissolve the Trust document at any time. Assets transferred into a Revocable Trust remain under the control of the Grantor, allowing access to the assets as if the assets were still titled under the Grantor’s individual name.
A funded Revocable Trust provides protection in the event the Grantor becomes incapacitated. Upon the Grantor’s passing, the Revocable Trust avoids Probate, saving time and money, and preserves privacy, while allowing uninterrupted access to trust assets. The retention of total control over the trust assets, the ability to amend or revoke the trust at any time, protection in case of incapacity, and the benefit of avoiding probate make this an all-time favorite trust.
While Revocable Trusts offer flexibility, the law requires certain types of Trusts to be Irrevocable to reap tax benefits, protect property from creditors, help the Grantor qualify for paid long-term care through Medicaid, or enable an individual to manage and invest property for others, including individuals with disabilities.
Once you establish an Irrevocable Trust, you cannot change or modify it in any way. The Grantor of an Irrevocable Trust gives up ownership and control over the Trust assets and appoints a third party to be the Trustee and manage the Trust. If you transfer real estate or other assets to your Irrevocable Trust, you cannot undo the transfer.
An Irrevocable Trust can create a safe haven for the placement of assets, protecting them from claims of creditors, beneficiaries, or even Medicaid. For instance, owning significant assets can cause ineligibility for Medicaid benefits, so a client might transfer property, such as the family home, to an Irrevocable Trust. If the transaction is structured and timed properly, the Grantor could become eligible to receive Medicaid funding to cover long-term care costs. Although most people do not like giving up control of their assets, in this instance, it is specifically the Grantor’s loss of control that starts the asset protection lookback period for Medicaid planning.
Another often used Irrevocable Trust is a Special Needs Trust. This Trust allows parents of children with disabilities to manage and invest assets that provide financial support for their child while maintaining the child’s eligibility for governmental assistance. There are many different kinds of irrevocable trusts, depending on what end goals you’re attempting to achieve.
Are There Downsides to Either Type of Trust?
Revocable and Irrevocable Trusts each have their disadvantages. When considering which Trust is best for you, remember that you are choosing a Trust based on your goals, although some of the following unfavorable factors may stop you from taking advantage of the Trust benefits.
Potential Disadvantages of Revocable Trusts
Since a Revocable Trust can be changed at any time, assets within the Trust are considered owned by the Grantor
There are no initial tax benefits to setting up a Revocable Trust
Creditors can make claims against the Trust to recover anything owed by the Grantor
Potential Disadvantages of Irrevocable Trusts
It is difficult or impossible for the Grantor to modify the Trust terms
The Grantor must give up control and ownership of the assets, being subject to the will of the Trustee
It limits Grantor’s flexibility to change or adapt to future needs or conditions
Requires separate tax identification number and the filing of separate tax return
A Trust can ensure that your assets go to your loved ones without going through probate. However, before you create a Trust, consider your goals and the different types of Trust you can use. This decision will be vital to how well your estate plan works for you and your family.
Guthro Law Can Design a Trust to Meet Your Needs
Learning about your options and the advantages and disadvantages of each Trust is the first step toward establishing the right plan for your situation. As an experienced estate planning firm, we can help assess your needs and develop a Trust Plan to achieve your objectives. We would be happy to guide you through the estate and trust planning process. Contact us today to schedule an appointment.
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Photo Highlights from My Trip to Sandwich, Massachusetts
From Wendy's trip to Sandwich, MA, Fall 2021
Have you ever been to Sandwich, Massachusetts? It's about 79 miles from Burlington, a charming little seaside town with a population of 22,000 residents. Enjoy some of my favorite photos or take a road trip out there and see the gorgeous landscapes for yourself.
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