The world of trusts has been shrouded in terminology and incomprehensible lingo.

Part of this is due to a longstanding history of acquisitive attorneys inventing dialects to make their products seem more sophisticated.

Among the many names used for trusts, here are a few: living trust, domestic asset protection trust, QTIP trust, A-B trust, grantor retained annuity trust, a “Walton” trust (named after the Walmart family.)

At the end of the day all you really need to know from a laypersons perspective is that all these funky trust names fall under the umbrellas of “revocable” or “irrevocable.”

Revocable simply means that as the person who created the trust, you can undue it during your life.

And irrevocable means that if you made the trust you cut yourself off and don’t allow for it to be revoked. You say “this trust shall not be revoked.”

And it’s that simple.

But Why?

Good question.

There are different goals that revocable v. irrevocable trusts accomplish.

The most commonly cited justification for an irrevocable trust is creditor or medicaid avoidance.

With a revocable trust you still “own” the assets, sort of. You still at the very least have access to the assets. Even if they’re in a trust you have the power to undue the trust because its revocable… So as far as the law is concerned, technically, you have access to the assets.

This means if medicaid estate recovery or creditors who you owe money to (i.e. someone who sues you), comes after you… they can go after your trust.

With an irrevocable trust, you are legally barred from revoking it. So in a legal sense, that money is not yours. If someone sues you or tries to take your assets… then they cannot go after your irrevocable trust.

Now, some caveats, the trust needs to be maintained for at least 5 years to avoid any “fraudulent” transfer claims from any creditors and to avoid the medicaid look back period.

Also, any access you have to the money will be considered yours so… if you get distributions from the trust, that is all vulnerable to creditor recovery.

In a sense, an irrevocable trust basically gives all your stuff to the trust and strips you of ownership.

That’s why there are some fancy shmancy trusts like the domestic asset protection trust which allows you to give up ownership while also being able to take some distributions for limited purposes that avoid creditor recovery.

So What Do I Need?

Well, if you have a fear of some suing you into bankruptcy you may want to consider three things.

Firstly, the number one cause of bankruptcy is medical debt. This means if you’re going to get sued to oblivion, a hospital will likely be the culprit. For that reason, you should have good health insurance.

Secondly, you should have good insurance generally. Have good home owners insurance, premise liability, car insurance, etc. Having adequate insurance should abate at least some of your fears of having the pants sued off you because before someone would consider going after your personal assets they’d have to spend through all your insurance. This means someone would have to get seriously, seriously injured or wronged by you.

Remember, in CT $250k of your home value is shielded from creditors, and in MA it’s a similar structure.

So the liklihood of someone choosing to sue you personally over your insurance is slim. Unless you have bad insurance or unless you’re rich. Rich people like irrevocable trusts for this very reason.

Third, remember that an irrevocable trust means you actually don’t own your stuff anymore. And there’s no redos.

Oh, and I’ll throw in a fourth.

Income gained in an irrevocable trust is taxed at the highest tax rate. So that sucks too.

Revocable trust

This is the option that many non-wealthy regular folks vibe with.

A revocable trust avoids probate, it keeps your assets private, and it distributes money how you want it to be distributed.

A Simple Will

A will accomplishes something similar, but a will doesn’t avoid probate. Additionally, a will is way more cost effective than getting a trust.

You can similarly name someone you trust a fiduciary (aka executor, or personal representative) to handle your assets when you pass away.