Types of Trusts: Which One Is Right for You?

In Illinois, there are many different types of trusts that a person may have created for them in order to protect their assets, their family, and their legacy. Each type of trust serves a different purpose; therefore, each would be used in different circumstances. But the question remains: with all the different types of trusts available, which one is right for you?

This is a question each person should ask their attorney. Trusts are complex documents that can impact many different areas of your life (and your family’s future), and it’s vitally important to make sure your trust is structured in a way that best fits your needs. 

This is why our estate planning team takes the time to sit down and talk with you, answer your questions, and ask some questions of our own. We don’t want you to walk away with a “cookie cutter” trust that might not fit your family. Instead, we choose to put some extra time in (that doesn’t cost you anything) so that we can ensure your estate plan is customized to your needs and can grow with you over time.

Types of Illinois Trusts

Revocable Trust (Living Trust)

A revocable or living trust is a good option for many people. It’s called “revocable” or “living” because the person for whom it is created (called the “settlor”) has the ability to change the terms of the trust throughout their lifetime, as long as they have the mental and physical capacity to make legal decisions. 

This type of trust allows you to add to or revise the trust as things change throughout your life. If you sell or purchase a property, the trust can be updated; as your family grows or changes, you can add or remove beneficiaries. 

The fact that this type of  trust is easy to manage is attractive to many people, and a revocable or living trust is a solid way to make sure your family won’t have to deal with the headache and expense probate. It may not, however, protect your assets from creditors or lawsuits, since you still legally control them in the trust.

Pros: easy to manage throughout your life, flexible, offers protection from probate
Cons: does not offer strong asset protection from creditors or lawsuits

Irrevocable Trust

As the name suggests, the irrevocable trust is basically the opposite of a revocable or living trust. It is not flexible, and once set in place, it usually cannot be changed without the consent  of all of the beneficiaries. 

While you can be your own trustee with a revocable trust, if you want to protect assets with an irrevocable trust, you usually cannot be the only trustee. This is because the main purpose of an irrevocable trust is to offer a high level of protection for your assets in the case of a lawsuit, or claims from certain creditors. It is often used for tax planning as well.

The basic idea behind this trust is that you don’t have legal control of the assets, so they can’t be taken. However, this type of trust will not grow with you as changes happen in your life, so it is vital to have a clear understanding of why you’re creating the trust.

Pros: high level of asset protection
Cons: not flexible, difficult to change or add to

Medicaid Asset Protection Trust

The federal and state rules for Medicaid are complicated, and they take your assets and net worth strongly into account. As you age, you may need the benefits offered by Medicaid in order to get the healthcare you need – but if they decide that your net worth is too high, you may not be eligible for it.

Many people in this situation have gathered assets throughout their lifetime that would affect their eligibility, but those assets may not be liquid. They may be in the form of real estate, cars or an RV or boat, or retirement accounts that they will need to live on for years to come. Having to sell or cash in on any of these assets in order to pay medical bills could not only be very difficult (and place them in a precarious situation going forward), but would also affect their ability to pass those assets down through inheritance.

This is where an asset protection trust can help. This is a type of irrevocable trust that is designed to protect your assets while allowing you to qualify for Medicaid. There are upsides and downsides to this structure, but if you won’t need easy access to your assets (i.e., you don’t anticipate needing to sell your home or liquidate accounts), this type of trust may be a good option for you.

Pros: protect your assets while still qualifying for Medicaid benefits for medical and long-term care
Cons: strict rules for accessing your assets, irrevocable trust (cannot change the terms of the trust)

Charitable Trust

Often, people will want their assets to be passed on to their children or other family members. However, there are cases where someone may want various assets (or their estate) to be passed on to a charitable organization. Perhaps they don’t have children or surviving family members, or perhaps they either founded or are passionate about supporting the organization, even after their death.

If this is something you would like to consider, a charitable trust may be something you wish to look into. It is a trust that allows you to make a philanthropic gift, but it also allows certain tax advantages.

As the name suggests, this type of trust must have a charity (a non-profit organization that meets the requirements of a charitable foundation) as its beneficiary. The assets in the trust cannot go to a person or a for-profit / non-charitable organization.

Pros: allows you to make a philanthropic gift, offers various tax benefits
Cons: must have a charitable organization as the beneficiary

Spendthrift Trust

If you are concerned about your children or other beneficiaries blowing through or wasting their inheritance, you can work with your attorney to create what is known as a spendthrift trust.

Although the name suggests that the beneficiary would be irresponsible, this type of trust is also a good way to pass an inheritance down to a child or grandchild who, although they’re legally an adult, just may not be old or mature enough to be able to handle a large inheritance all at once. 

A spendthrift trust has the benefit of holding the assets you wish for the beneficiary to inherit, but also structures how they can withdraw or access assets in order to help them use their inheritance wisely.

Putting the Right Plan in Place

There are other types of trusts, but these are the types of trusts that most commonly fit people’s needs. If you would like to learn more – or if you’re ready to put your own trust in place – give us a call today or click below to to schedule your free consult.

DISCLAIMER: Any information contained herein is solely for informational purposes. While it is important that you educate yourself, nothing herein should be construed as legal advice or create an attorney-client relationship. For specific questions, we urge you to contact a local attorney for advice pertaining to your specific legal needs.