When you sit down to create your estate plan you will likely create a Last Will and Testament to serve as the foundation of that plan. Many people, however, also include several other estate planning tools and strategies in their plan in order to achieve the numerous estate planning goals they have included in their plan. A trust, for example, is a common additional to any comprehensive estate plan. You may have heard people discussing their irrevocable trust which they have included in their estate plan and wondered “Why would I want an irrevocable trust?” By learning more about trusts in general, and irrevocable trusts in particular, you can find the answer to that question.
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also referred to as a Maker or Grantor, who transfers property to a Trustee. The Trustee holds that property for the beneficiaries of the trust. Though you may not realize it, you likely enter simple trust agreements on a regular basis. For instance, imagine that your mother asked you to hold onto a family heirloom until your niece is old enough to properly appreciate and care for the heirloom. In that case, your mother is the Settlor, you are the Trustee, and your niece is the beneficiary of the trust.
Testamentary vs. Living Trusts
Trusts are first divided into testamentary trusts and inter vivos, or living, trusts. A testamentary trust is one that does not take effect until your death. A living trust, on the other hand, will take effect as soon as all the formalities of creation are complete and sufficient assets are transferred into fund the trust. Living trusts are further divided into revocable and irrevocable trusts.
Revocable vs. Irrevocable Trusts
Trusts can be further divided into revocable and irrevocable trusts.
A revocable trust can be modified or revoked at any time, and for any reason, by the Settlor of the trust. That means that after your trust is active you can add or remove a beneficiary, amend or delete any of the trust terms, or revoke the entire trust if you choose to do so for any reason. By their very nature, a testamentary trust is always a revocable trust because it does not even take effect until the death of the Settlor. A living trust, on the other hand, can be either revocable or irrevocable. An irrevocable trust is one that cannot be modified or revoked by the Settlor once the trust takes effect.
When Is an Irrevocable Living Trust Preferable?
One of the major differences between an irrevocable and a revocable trust is found in the way the law views assets transferred into the trusts. Because you retain the ability to withdraw assets from a revocable living trust the law considers those assets to still be available to you and within the reach of creditors. Assets transferred into an irrevocable living trust, however, become the property of the trust once the transfer is complete. Therefore, they are out of the reach of creditors which is why irrevocable living trusts are often used for asset protection purposes. Just because assets have been transferred into an irrevocable living trust, however, does not mean you cannot continue to benefit from the assets. With a well drafted asset protection trust you may be able to continue to receive the interest off the assets, even though you no longer own the assets and cannot control the assets. The same reasoning applies to Medicaid trusts, which are also irrevocable living trusts. By transferring asset into a Medicaid trust you remove those assets from your “countable resources” for purposes of qualifying for Medicaid; however, you might still be able to receive the interest earned on the assets. Another common reason to create an irrevocable living trust is if you have a child with special needs. A special needs trust can protect assets designated for your child without jeopardizing his/her eligibility for much needed state or federal assistance programs such as Medicaid or SSI.
How Do I Know Which Type of Trust I Need?
Because creating a trust can be complicated given the numerous choices that must be made during the creation process, it is always best to consult with an experienced North Dakota estate planning attorney first. Your estate planning attorney can evaluate your individual goals and needs and help you decide which type of trust is right for you.
For more information, please join us for one of our upcoming free seminars. If you have additional questions about irrevocable trusts, or estate planning in general, in the State of North Dakota please contact the experienced estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.
- Estate Planning for Parents of Young Children - May 14, 2020
- Estate Planning Terms You Need to Know - April 23, 2020
- Steps You Can Take to Decrease the Odds of a Challenge to Your Will - February 7, 2019