What’s the difference in a revocable and irrevocable trust?
There are two basic types of trusts — revocable and irrevocable.
So what is a trust?
A trust is a box that we put assets into — our house, our investments, checking accounts, etc. In the video we illustrate this by using a fancy treasure chest — well, it was ten dollars off Amazon. 🙂
What is a revocable trust or revocable living trust?
A revocable trust is one that I can change my mind on — I can put assets (“stuff”) into it and I can take assets out of it. It is still my stuff even though it is in a revocable trust. Basically the laws recognize the stuff in a revocable trust as still being my stuff.
(It’s called a “living” trust as I set it up while I’m living).
Do I get asset protection with a revocable living trust?
So for asset protection the stuff that is in my revocable living trust is still mine — it is not protected from creditors (including bankruptcy) and predators (lawsuits, divorce, etc). There are numerous advantages to a revocable trust but asset protection while you are living is not one of them
“But I want asset protection for my stuff while I’m still living.”
We get this by using an IR-revocable trust.
Well, what is an irrevocable trust?
A trust that once I put my stuff in there, I can’t get it out for my benefit. Think of a treasure chest with the lid closed.
We do this for several reasons.
First, it provides asset protection because the general rule is whatever I can get my hands on, so can my predators and creditors. So if I can’t get my stuff out of the trust for my benefit, then neither can my predators and creditors. (There are a lot of issues here — we are just hitting the major point without getting into the exceptions).
Second, it can help us qualify for government benefits such as Alabama Medicaid (pays for long term care in a nursing homes) and VA Pension (up to $25,000 a year tax free for qualified veterans or widows) that have asset limits. So if you have assets in your name (or spouse’s name) or in a revocable living trust, the government considers the assets to be yours. BUT if the assets are in an ir-revocable trust, then the assets are not considered yours if they are in the right type of trust.
This can allow you to qualify for these benefits.
Warning: you must have a good plan in place before you transfer assets into a trust to make sure it is the right time, the right assets, and the right type of trust. There are consequences under the law to transferring assets so this is not something to do casually or because a friend told you it is good idea — instead it needs to be a part of an overall plan or strategy.
So which is better — a revocable or irrevocable trust?
Well, they are simply tools that have different uses. Which is better, a hammer or a saw? A car or a plane? Depends on what you need to use the tool or vehicle for — that will tell you which is the best tool for you now.
Find and use the right tool to fit your unique situation.
If you would like to chat with us in person, by phone or by video so that we can help you understand your options, give us a call at 205-879-2447 or contact us through our estate planning/elder law website.
John G. Watts
Watts & Herring, LLC
Birmingham and Madison Offices in Alabama
We represent consumers from all parts of Alabama