A lot of people assume that you cannot revoke a trust after it has been created. If you harbor this misconception, you may not consider the utilization of a trust because you do not want to take such a huge step.
In fact, there are two different categories of trusts, and we will provide some clarity in this post.
There are in fact some trusts that cannot be revoked, and they can only be changed under very limited circumstances. The trustee is the trust administrator, and you cannot act as the trustee if you establish an irrevocable trust.
Since you cannot manage the assets in the trust, and you cannot revoke it, you are surrendering incidents of ownership when you establish an irrevocable trust. This can be beneficial if you have certain objectives.
For example, Medicare does not pay for long-term care, and most seniors will need help with their activities of daily living. Medi-Cal will pick up the tab if you can gain eligibility, but you cannot qualify if you have more than $2000 in countable assets.
In an effort to gain eligibility, you could convey resources into an irrevocable, income only Medi-Cal trust. The principal would not count if you apply for Medi-Cal as long as you fund the trust at least 30 months before you submit your application.
While you are still living independently, you could receive distributions of the trust’s earnings. You could convey your home into the trust along with income-producing assets, and it would be protected during the Medi-Cal estate recovery phase.
People also use irrevocable trusts to mitigate estate tax exposure. This tax is applicable on the portion of an estate that exceeds $11.7 million, so most people do not have to be concerned about it.
However, it carries a 40 percent rate, so it can have significant impact if you have enjoyed a great deal of financial success. These are a couple of the reasons why people use irrevocable trusts, and there are a number of others.
Revocable Living Trust
There is also the revocable living trust, which is a trust that can be rescinded or revoked after it has been created. You would act as the trustee if you establish a living trust, so you would retain control of the assets.
Because you do not surrender incidents of ownership, the assets would count if you apply for Medi-Cal, and they would be part of your estate. They would also be available to a litigant if you are the target of a lawsuit.
You would name a successor trustee to administer the trust after your death, and this person or entity could also be empowered to act as the administrator in the event of your incapacity.
After your death, the trustee would be able to distribute assets to the beneficiaries outside of probate. This is a legal process that would enter the picture if you use a will to facilitate postmortem asset transfers.
Probate will take about nine months at minimum to run its course, and no inheritances are distributed during this interim. Probate records are available to the public, so there is a loss of privacy, and probate expenses consume a portion of the estate.
Another major benefit is the ability to include spendthrift protections. The trust would become irrevocable after you are gone, and the beneficiaries’ creditors would not be able to go after the principal.
You can instruct the trustee to distribute limited assets incrementally over an extended period of time to make sure that the beneficiaries do not burn through their inheritances too quickly.
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At the end of the process, you will go forward with a custom crafted plan that ideally suits your needs.
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