Why Do I Need an Irrevocable Trust?
While a Will is an excellent estate planning tool, there are some downsides to having a Will as your sole estate plan.
WillA Will is a legal document memorializing your wishes on how you want your estate to be distributed after you die. It allows you to provide for those you care for, both family and friends, as well as charities and institutions. In addition, the Will can name a guardian for minor children, and can create trusts on behalf of beneficiaries to provide protections for their inheritance.
When you die, your Will is required to go through a court process known as a probate proceeding. The Executor of your Will, the person named to be in charge, must first be appointed by the court to act on behalf of your estate. Only then can the Executor distribute your assets as per the provisions stated in your Will.
Consequences of Relying on a WillWhile a Will is an excellent estate planning tool, there are some downsides to having a Will as your sole estate plan. As mentioned above, your Will must go through a probate proceeding upon your death. This requires that notice of the Will be given to your next of kin. If your next of kin are easily identifiable and are not being disinherited, then the process should go smoothly. For example, the probate proceeding should be simple for a woman leaving her estate in equal shares to her only two children, both of whom are in agreement with the terms of the will. But if she decided to disinherit one of her daughters, or if she did not have children and her next of kin were not able to be located, the probate process would prove to be more difficult, costly, and time-consuming. Another negative aspect of the probate process is that any documents filed in court as part of the proceeding become a matter of public record.
TrustsAlternatively, a Trust is a private document with instructions on how assets are to be administered both during one's lifetime and after death. The Grantor (creator of the Trust) appoints a Trustee to act on behalf of the Trust. A Trust maintains the same benefits as those found in a Will, but upon the Grantor's death, the Trust does not go through the probate process and is instead administered without court intervention.
There are many types of Trusts. Each type avoids the probate proceeding but creating a specific type of Trust can also have the benefit of protecting assets during one's lifetime when there is a current need or future concern for homecare or nursing home care. The irrevocable trust created for Medicaid purposes must name someone other than the Grantor or the Grantor's spouse as Trustee. The Grantor can retain the right to all income derived from Trust assets, the ability to remove and replace any trustee, and have a limited power of appointment which allows the Grantor to change the beneficiaries of the Trust.
Irrevocable TrustsWhen an Irrevocable Trust is created, assets that the Grantor wants to protect are then retitled in the name of the Trust. This is what we call "funding the trust." Assets include anything from a checking or brokerage account to the title of one's residence. Individual Retirement Accounts do not get retitled into the name of the Trust since they are already protected for Medicaid purposes by law.
However, it should be kept in mind that the Grantor is not entitled to principal, or corpus, of any assets placed in an Irrevocable Trust. While the Grantor cannot use the principal of the Trust, he or she is entitled to all income (interest, dividends, etc.) that the Trust assets may generate. Since the Grantor must appoint a separate (non-spouse) individual(s) to act as Trustee of the Trust, it is the Trustee's role, and not the Grantor's, to invest the assets held by the Trust.
ConclusionDeciding which estate plan is right for you will depend on the surrounding circumstances. No two clients are alike, which is why it is important to evaluate which plan best achieves your personal goals and alleviates your concerns.