What is a Trust?
Put simply, a trust is a legal arrangement whereby a one person (the Settlor) puts his or her “stuff” in the trust to be managed by a second person (the Trustee) for the benefit of a third person (the Beneficiary).
Importantly, one person can be all of these. In other words, you can wear all three “hats.” You can be the Settlor, and the Trustee and the Beneficiary. Alternatively, more than one person can be each of these. So, for example, two spouses can be the Settlors, and two spouses can be the Co-Trustees. In addition, both spouses can be the beneficiaries of the Trust, and/or they can include their children as beneficiaries.
Functionally, when you create the trust you are acting as Settlor. When you manage trust assets, you are acting as Trustee. When you receive the benefit of the trust assets, you are acting as a beneficiary.
What are the types of Trusts?
There are many different types of trusts. However, for most middle income clients that do not have heirs that are disabled, there are basically two types of trusts that are most relevant. The two general types are a “revocable trust” and an “irrevocable trust”.
What is a Revocable Trust and what can it accomplish?
A Revocable Trust is a trust in which the Settlor can revoke the property that the Settlor put into the trust in whole or in part, usually at any time during the life of the Settlor. A Revocable Trust is used primarily to achieve one or more of the following goals:
- Avoid probate. To learn what probate is, click here and here.
- Provide a vehicle to manage the Settlor’s assets during life and after death.
- Achieve a degree of privacy (since probate is a public process).
- Used as a “joint will” by spouses.
- Avoid income tax complications.
Probate avoidance is generally a good use of a Revocable Trust. However, as discussed here, in Louisiana the probate process is not the bugaboo that it is in other states. So “probate avoidance” in Louisiana is usually not the concern that some trust mills make it out to be.
A great use of a Revocable Trust is that it can be used used to write a “joint will” with a spouse. This is particularly useful in the context of second marriages and where there are heirs from prior marriages. To learn more about this, go to the page on Revocable Trusts here[4].
Because a Revocable Trust is revocable, it generally cannot be used for asset protection purposes, particularly while you are alive. That is because any property that you have the ability to revoke out of the trust can be put back in your name, and any property that can be put back in your name is not protected from lawsuits or for Medicaid planning purposes. Again, for more on the limitations of Revocable Trusts, go to this webpage here.[5]
What is an irrevocable trust and what can it accomplish?
An irrevocable trust is a trust that cannot be “revoked” by the Settlor in whole or in part. An irrevocable trust is used primarily to achieve the following goals:
- Achieve asset protection for a client.
- Medicaid nursing home qualification (to get the 5-year lookback period running for purposes of Medicaid long-term care).
- Maintain full control over your assets during your life (you children will not have any say in your assets).
- Achieves all the goals that a revocable trust achieves, including:
Because an irrevocable trust is “irrevocable” it can be used for asset protection purposes, including planning to qualify for Medicaid nursing home care.
Despite the word “irrevocable”, the irrevocable trust is not as dreadful as it would appear to be. Remember, as long as you are the Trustee, you are able to manage the property in the irrevocable trust for your life, and no one can take that property from you as Trustee.
To learn more about Irrevocable Trusts, go here.[8]