There are variations that fall under both umbrellas, but there are essentially two different types of trusts: revocable and irrevocable trusts. The names are pretty much self-explanatory. You can rescind or dissolve a revocable trust, and you cannot do this if you have the other type of trust.
Once you digest that distinction, you may wonder why you would ever want to use a trust that you cannot revoke when you have another option. You can keep reading to get the answer to this question.
Incidents of Ownership
In the legal parlance, there is a concept called “incidents of ownership,” and it has significant implications. When you establish an irrevocable trust, you would be surrendering incidents of ownership. This is because you cannot revoke the trust, and you cannot act as the trustee.
Generally speaking, you would not be able to change the terms of the trust either. This can sound a bit scary, but there are some good reasons why you may want to forfeit incidents of ownership.
Most senior citizens will need some type of living assistance, and more than one third of elders will eventually reside in nursing homes. These facilities are very expensive, and Medicare does not pay for long-term care.
Medicaid will pick up the tab, but it is a need-based program. You cannot become eligible if you have more than $2,000 of countable assets in your own name.
In an effort to create a financial profile that will lead to eligibility, you could convey assets into an irrevocable income-only Medicaid trust. When you do this, the resources would not count against you if you apply for Medicaid coverage.
You could continue to receive income that is generated by the principal until you actually endeavor to obtain eligibility for this benefit.
Estate Tax Efficiency
High net worth families have to be concerned about estate taxes. There is a federal estate tax that is only a factor for people that will be passing along more than $11.58 million.
Some states have state-level estate taxes, and the exclusions in these states are usually much lower. We do not have this type of tax in Ohio, but people that are exposed to state or federal estate taxes use irrevocable trusts to gain estate tax efficiency.
Remarriage Protection for Parents
If you are getting remarried and you have children from a previous marriage, you may have inheritance planning concerns. This is quite possible if you have been successful financially and you are marrying someone that is quite a bit younger than you.
A widely embraced solution is an estate planning device called a qualified terminable interest property (QTIP) trust, which would be an irrevocable trust.
The way it works is you fund the trust, and you name a trustee to act as the estate administrator. It can be someone that you know personally, but many people use a professional fiduciary like a trust company or the trust department of a bank.
Your spouse would be the first beneficiary, and your children would be the successor beneficiaries. If you do in fact predecease your spouse, the trustee would be able to distribute the trust’s earnings to your spouse. You can give the trustee the discretion to distribute portions of the principal if this is your choice.
The surviving spouse could also use property that has been conveyed into the trust without actually owning it. After the death of the first beneficiary, your children would become the beneficiaries of the trust.
Schedule a Consultation Today!
If you are ready to put an estate plan in place, we are here to help. You can schedule a consultation appointment if you give us a call at 513-721-1513, and there is a contact form on this website you can use to send us a message.
- What You Need to Know about Elder Abuse - May 18, 2023
- Celebrate Older Americans Month This May - May 16, 2023
- Why Incapacity Planning Should Be Included in Your Estate Plan - May 11, 2023