Common Misunderstandings About Trust Types

Trusts are a valuable estate planning tool, yet they are often misunderstood. Many people assume that trusts are only for the wealthy, that all trusts serve the same purpose, or that creating a trust eliminates the need for a will. These misconceptions can lead to costly mistakes, potentially jeopardizing an individual's estate planning goals.

At Heritage Law Office, we help clients navigate the complexities of trust planning, ensuring they choose the right trust for their needs. If you have questions about trusts, contact us or call 414-253-8500 for legal guidance.

1. "Trusts Are Only for the Wealthy"

One of the biggest misconceptions about trusts is that they are exclusively for the ultra-rich. While high-net-worth individuals frequently use trusts to manage large estates, trusts are beneficial for people of all income levels.

A trust can help:

Avoid probate, which can be time-consuming and costly
Protect assets from creditors or lawsuits
Ensure minor children or beneficiaries with special needs are financially secure
Minimize estate taxes (in some cases)

Even if you have a modest estate, a properly structured trust can help you protect your assets and pass them on according to your wishes.

Common Types of Trusts and Their Uses

Trust Type	Primary Purpose	Can It Be Changed?	Asset Protection?	Avoids Probate?
Revocable Living Trust	Manages assets during life & avoids probate	Yes	No	Yes
Irrevocable Trust	Protects assets & minimizes estate taxes	No	Yes	Yes
Spendthrift Trust	Limits a beneficiary's access to assets	No	Yes	Yes
Medicaid Asset Protection Trust	Helps qualify for Medicaid while preserving assets	No	Yes	Yes
Charitable Trust	Provides gifts to charities & tax benefits	No	Limited	Yes
Testamentary Trust	Created by a will to manage inheritance	No	Limited	No (goes through probate)
Special Needs Trust	Protects assets for individuals with disabilities	No	Yes	Yes

2. "Once a Trust Is Created, It Cannot Be Changed"

Many people believe that once they set up a trust, it is set in stone. However, this depends on the type of trust you establish.

Revocable Trusts can be modified or revoked by the trust creator (grantor) during their lifetime. These are flexible and commonly used for estate planning.
Irrevocable Trusts, on the other hand, cannot be changed or revoked once they are established, except in limited circumstances. These trusts are often used for asset protection, Medicaid planning, or tax benefits.

Understanding the distinction between revocable and irrevocable trusts is crucial when setting up an estate plan.

Revocable Trust vs. Irrevocable Trust

Feature	Revocable Trust	Irrevocable Trust
Control Over Assets	Grantor retains full control	Grantor gives up control
Can It Be Modified?	Yes, can be changed or revoked	No, generally cannot be changed
Asset Protection	No, assets are still accessible to creditors	Yes, assets are protected from creditors
Estate Tax Benefits	No, assets remain part of the estate	Yes, may reduce estate tax liability
Probate Avoidance	Yes, if properly funded	Yes, if properly funded
Best For	Managing assets during life & avoiding probate	Asset protection & tax planning

3. "A Trust Replaces a Will"

While a trust is a key estate planning tool, it does not necessarily replace a will. Instead, they often work together.

A will is still necessary for:

Naming guardians for minor children
Handling assets not included in the trust
Providing instructions for final wishes

Additionally, many people use pour-over wills to ensure that any remaining assets outside the trust are transferred into it upon death. Without a will, assets not placed in a trust may go through probate-something many seek to avoid.

4. "Trusts Automatically Protect Assets from Creditors"

Not all trusts provide asset protection. Only certain types of trusts, such as:

Irrevocable Trusts
Spendthrift Trusts
Medicaid Asset Protection Trusts

…can shield assets from creditors, lawsuits, or Medicaid recovery.

A revocable trust does not offer protection from creditors because the grantor still has control over the assets. If asset protection is a goal, an irrevocable trust or a spendthrift trust may be a better option.=

5. "Trusts Help You Avoid All Taxes"

While some trusts can provide tax advantages, not all trusts eliminate taxes. The extent of tax savings depends on the type of trust and the estate's value.

Revocable Trusts do not provide tax benefits because the assets remain in the grantor's control and are still part of their taxable estate.
Irrevocable Trusts can remove assets from the grantor's estate, potentially reducing estate taxes and offering benefits for gift tax and Medicaid planning.
Charitable Trusts may offer income tax deductions while benefiting a charitable cause.

Understanding tax implications is crucial when selecting a trust, and consulting an estate planning attorney can help structure a trust that aligns with tax-saving goals.

6. "A Trust Must Contain All Your Assets"

A trust does not have to hold all of your assets to be effective. Many people choose to place certain assets in a trust while keeping others outside of it.

Common assets placed in trusts include:

Real estate
Bank accounts
Investments
Business interests

However, some assets-such as retirement accounts (401(k)s, IRAs)-are generally not transferred directly into a trust due to tax consequences. Instead, proper beneficiary designations are used to ensure these assets pass outside of probate.

7. "A Trust Takes Effect Only After Death"

Unlike a will, which only takes effect upon death, a trust can be active during your lifetime. This is especially useful if you become incapacitated.

For example:

A revocable living trust allows you to manage your assets while you are alive and names a successor trustee to step in if you become unable to manage your affairs.
An irrevocable trust may allow for asset protection and Medicaid planning while you are still living.

Creating a trust can ensure that your assets are managed according to your wishes both during your lifetime and after your passing.

8. "Setting Up a Trust Is Complicated and Expensive"

Many people assume that creating a trust is too complex or costly, so they avoid it altogether. However, the long-term benefits of a trust-such as avoiding probate, protecting assets, and reducing taxes-often outweigh the upfront costs.

Additionally, working with an experienced estate planning attorney ensures that the process is smooth and that the trust is properly drafted to meet your needs. DIY trusts or improperly structured trusts can lead to costly legal issues down the road.

9. "Trusts Are Only for Older People"

Estate planning isn't just for seniors-younger individuals and families can also benefit from trusts.

You may want to consider a trust if you:

Have minor children and want to ensure financial security for them
Own a business or valuable assets
Want to protect assets from divorce or creditors
Are planning for long-term care or Medicaid eligibility

Setting up a trust early can help you plan for the future and avoid legal complications later.

10. "I Don't Need an Attorney to Set Up a Trust"

While it is possible to create a trust using online templates, estate planning is not one-size-fits-all. A poorly drafted trust may:

Fail to accomplish your goals
Be challenged in court
Have unintended tax consequences

An estate planning attorney ensures that your trust is legally sound and customized to your unique situation.

Contact an Estate Planning Attorney for Trust Guidance

If you're considering a trust, it's essential to understand how different trust types work and which best suits your needs. Misconceptions can lead to costly mistakes, but working with a knowledgeable estate planning attorney ensures that your assets are protected and distributed according to your wishes.

At Heritage Law Office, we assist clients with trust planning, estate administration, and probate matters. Contact us online or call 414-253-8500 to schedule a consultation.=

Frequently Asked Questions (FAQs)

1. What is the main difference between a revocable and an irrevocable trust?

A revocable trust allows the grantor to retain control over the assets and make changes or revoke the trust at any time. An irrevocable trust, once established, generally cannot be changed or revoked, providing asset protection and potential tax benefits.

2. Can a trust help me avoid probate?

Yes, a properly funded revocable or irrevocable trust allows assets to pass directly to beneficiaries without going through probate, which can save time, money, and maintain privacy. However, any assets not placed in the trust may still be subject to probate.

3. Do I need both a will and a trust?

In most cases, yes. A trust manages assets placed into it, while a will handles any assets outside the trust and allows you to name a guardian for minor children. Many estate plans use a pour-over will to transfer any remaining assets into the trust upon death.

4. Are assets in a revocable trust protected from creditors?

No, assets in a revocable trust remain under the grantor's control and are not shielded from creditors. To protect assets from lawsuits or creditors, an irrevocable trust or a spendthrift trust may be a better option.

5. Can I change the beneficiaries of my trust?

For a revocable trust, the grantor can modify beneficiary designations at any time. For an irrevocable trust, changes are generally not allowed unless a legal process, such as trust decanting or court approval, is followed.