Our team at Waserstein & Nunez helps both local and international clients make sure their estates are in order and set up for success. We find that many clients come to us with the idea that an estate is simply a will or a trust, but the truth is that there are several ways to establish and secure your estate.
Nobody has lived the same circumstances as the next person. Ultimately, we all have our own experiences to account for when the time comes. Choosing the right type of estate for your assets and desires for those assets will be crucial not only in planning for a future after you’re gone but also for tax purposes in your lifetime. So, let’s dive into revocable and irrevocable trusts.
Revocable vs. irrevocable
First of all, let’s dive into these terms themselves before getting into what the trusts themselves look like. The names present the most obvious difference between the two types of estates.
In the case of a revocable trust, you are crafting a plan that allows you to change the terms as you desire. You can place assets in and take assets out during your lifetime. There can be certain financial and tax implications of adding and removing assets from the trust depending on certain circumstances. These are often referred to as “living” trusts.
In an irrevocable trust, the terms of the trust are locked in place at the time the trust is formed. This means assets are placed into the trust and cannot be removed by you. Instead, the assets can only be removed once the circumstances laid out in the trust are met by the designated beneficiary.
Trustee designations
One of the key differences upfront between revocable and irrevocable trusts is that you can be the trustee for the revocable trust. In the case of an irrevocable trust, someone other than the grantor (you) must be designated as the trustee. The trustee will have control over the assets held within the trust until the assets are ready to be distributed as detailed in the trust documents.
It’s important to note that just because the trustee assumed control over the assets placed in a trust does not mean ownership necessarily changes. For instance, you can place your home into a trust but continue living in and utilizing the home for your own personal benefit.
Tax and financial implications
For people considering tax implications for a trust, an irrevocable trust will be the best option. Irrevocable trusts offer significant tax advantages because assets placed in an irrevocable trust will generally not be considered when calculating your income and taxable assets.
The same is true for preserving qualifications for certain government benefits such as Medicaid. An irrevocable trust (specifically a Medicaid Asset Protection Trust) ensures those assets are not considered when applying for Medicaid. When you apply, the government will carry out a means test, taking into consideration the previous five-year period to ensure you actually qualify. If you have too many assets then you will not qualify, so placing them in this type of irrevocable trust five years before you qualify or apply for Medicaid preserves your qualification.
Risks and costs
All of this makes an irrevocable trust sound like an ideal choice for anyone, right? Well, it depends on your circumstances. If you have significant assets and net worth then an irrevocable trust makes a lot of sense. But, because irrevocable trusts are expensive and complicated to establish, someone with fewer assets or a lower net worth may not need to go through the effort and cost associated with irrevocable trusts.
Revocable trusts can be much cheaper to set up and carry little risk. If you change your mind later in life about a certain asset then you can make those changes as you desire through a revocable trust. An irrevocable trust creates the risk of no longer being able to make those decisions without legal approval first.
Ultimately, the right estate planning attorney can assist you in choosing the appropriate avenue for your estate. Whether you think a will can suffice or you want to go with one of the many forms of trusts, the team at Waserstein & Nunez can help you get it done right. If you’re handling significant assets then let us take care of your estate and provide peace of mind for your future. Contact our team and get your plan done right.
Waserstein & Nunez, PLLC
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