Trusts are versatile tools in estate planning, offering benefits like asset protection, tax efficiency, and probate avoidance. One common concern is whether creating a trust means surrendering access to your assets.
The answer depends on the type of trust and its specific terms. Understanding these distinctions helps you make informed decisions that align with your estate planning goals.
Understanding Trust Basics
A trust is a legal arrangement where one party, the trustee, manages assets on behalf of beneficiaries. The person who establishes the trust, known as the trustor (sometimes referred to as the grantor or settlor), creates the legal document outlininh the rules and purpose of the trust.
Trusts fall into two broad categories: revocable and irrevocable. Each type serves distinct purposes and determines your level of access and control over the assets.
Revocable Living Trusts: Retaining Control
A revocable living trust allows you as the Trustor to maintain complete control over your assets during your lifetime. You can amend or revoke the trust anytime you wish. That means you can change the terms of the trust. You can also name yourself as the trustee of your trust. The trustee is the person who manages the assets in the trust. If you are the trustee of the trust, you have total contol over how the trust assets are managed, just as you did when you owned the assets in your individual or joint names.
Typically, you also name yourself as the beneficiary of the trust, so assets placed in a revocable trust remain accessible to you. This makes it an excellent option for those who want to avoid probate while preserving flexibility. However, because you retain control, the assets are not shielded from creditors, lawsuits, or certain tax implications.
Key Features of a Revocable Living Trust
- Full Access to Assets: You can add, remove, or use trust assets without restrictions.
- Flexibility: The trust can be amended or revoked as your circumstances or preferences change.
- No Asset Protection: Since the assets remain under your control, they are not protected from creditors or legal claims.
Revocable living trusts are ideal for individuals seeking simplicity and control while ensuring their estate plan is easy to administer upon death.
Irrevocable Trusts: Limited Access
An irrevocable trust, on the other hand, requires surrendering some level of control over the assets. Generally, once assets are transferred, you cannot amend or revoke the trust without the beneficiaries’ consent, in some cases, court approval, or through the assistance of a Trust Protector if that provision is included in your trust. This setup is often chosen for asset protection, tax planning, or Medicaid eligibility.
While you may lose direct access to the assets, irrevocable trusts offer significant advantages, such as shielding the assets from creditors, lawsuits, and estate taxes. These benefits come with the trade-off of reduced flexibility.
Key Features of an Irrevocable Trust
- Limited Control: Once assets are transferred, the trust terms govern their use.
- Asset Protection: Assets are typically shielded from creditors and lawsuits.
- Tax Advantages: Irrevocable trusts can reduce estate tax exposure and facilitate tax-efficient gifting strategies.
Irrevocable trusts are often used in situations where long-term asset preservation or eligibility for government benefits like Medicaid is a priority.
Access to Income or Benefits
Even with an irrevocable trust, you may retain access to some benefits. For example, certain trusts allow you to receive income generated by the assets, such as interest or rental income. In these cases, you don’t access the principal, but you still benefit financially.
A qualified personal residence trust (QPRT) is one example where you can continue to live in a home placed in the trust for a specified period. Similarly, a charitable remainder trust (CRT) allows you to receive income from the trust during your lifetime before the remainder passes to a designated charity.
These arrangements balance asset protection with the ability to benefit from the trust’s resources.
Medicaid Planning and Asset Access
For individuals planning for long-term care, irrevocable Medicaid trusts are a common strategy. This is because Medicaid will cover custodial care and Medicare will not.
Assets placed in this type of trust for a period that exceeds Medicaid’s 60-month look-back period are no longer considered part of your estate for Medicaid eligibility purposes. However, you may still receive income generated by the trust assets while ensuring the principal is protected for your beneficiaries.
Again, as a reminder, it’s essential to note that qualifying for Medicaid benefits involves a five-year look-back period. Transferring assets into a trust too close to the time you apply for Medicaid could disqualify you temporarily. Proper planning well in advance ensures the trust achieves its intended purpose.
Trusts for Asset Management
Trusts are also valuable for managing assets on behalf of others. For instance, a special needs trust protects assets for a disabled individual without jeopardizing their eligibility for government benefits. Similarly, a spendthrift trust restricts a beneficiary’s access to the principal to prevent misuse of the funds.
In these cases, the trustee controls the assets while ensuring they are used according to the trust’s terms. This structure provides security and oversight for vulnerable or financially inexperienced beneficiaries.
Deciding What’s Right for You
Whether you surrender access to assets in a trust depends on your goals and the type of trust you establish. Revocable trusts allow you to retain full control and access, while irrevocable trusts offer enhanced protection and benefits at the cost of flexibility.
By understanding how different trusts operate, you can confidently incorporate them into your estate plan. With the right approach, you can balance control, protection, and long-term planning for your assets and loved ones.
Check Out Our Testimonials!
If you’re thinking about engaging our firm, you may want to gain some insight before you take the plunge. With this in mind, we have published a number of testimonials that have been shared by our clients, and you can visit this page to access them: Tulsa/Oklahoma City estate planning testimonials.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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