Revocable vs Irrevocable Trust: Key Differences to Note
Revocable vs irrevocable trust – what’s the difference, and more importantly, which one is right for your estate planning needs?
Read further for the details.
Introduction
It is not uncommon to hear someone toss around the term trust when speaking about his or her estate or property. Trusts (sometimes referred to as living trusts) are often created for different reasons, but primarily to ensure the proper distribution of assets upon death. Beneficiaries are listed and a trustee is appointed, who is given power to handle the trust when necessary.
Trusts can include things such as houses, properties, automobiles, bank accounts, and investment accounts, as well as insurance policies. Without the need to enter probate, the assets would be distributed to the beneficiaries as stated in the trust.
While there are different types of trusts, two of the most often referred to are revocable trusts and irrevocable trusts. So, what are the differences between the two? Let’s take a look.
A Revocable Trust
When it comes to a revocable trust, the most important identifying characteristic of this trust is that it can be revoked and modified at any time by the trustor (also known as the grantor). Hence, it’s named a revocable trust.
Once assets are entered into this type of trust, they do not change ownership. They are still owned – legally – by the grantor until his or her death. At that time, the assets would be distributed to beneficiaries.
What happens upon the trustor’s death? This same revocable trust becomes irrevocable.
Benefits of a Revocable Trust
If you are wondering why someone would consider a revocable trust – or a trust at all – we’ve got a few reasons for you.
The ability to make changes. Let’s be real – life can have crazy ups and downs. And well, we make decisions today based on current circumstances that may one day change. A revocable trust allows you to make changes to your trust whenever – and however – you see fit. You can add heirs, remove heirs, change your distribution percentage, and so on as you deem appropriate.
Protection for yourself and your loved ones. When you place your assets in a revocable trust, you can maintain control of your assets – until you can’t. As previously stated, your assets are still legally yours despite being part of the trust. However, when you are no longer able to manage them, say due to death or a disease such as Alzheimer’s, there will be a plan in place to handle your assets.
Avoiding probate. Perhaps one of the biggest reasons someone opts for a revocable trust is that it keeps your estate out of probate upon your death. Probate court can be a huge headache for family members and loved ones. And, it can tie up your assets for a long time. Besides, nobody wants to have to sit in court talking about their deceased loved one’s assets while they are still grieving.
The trust will allow for the easy distribution of assets according to the plan – without involving a lengthy court process.
An Irrevocable Trust
Just like the most identifying characteristic of a revocable trust is that you can change (or revoke) it at any time, an irrevocable trust means that you cannot change it or revoke it. That’s right – once your assets and plan are put into writing in an irrevocable trust, that’s it – it stays that way. You cannot make changes. You cannot change your mind.
Why?
Well, when your assets are placed into an irrevocable trust, it no longer belongs to you – your assets belong to the trust.
Benefits of an Irrevocable Trust
Considering the stark difference between revocable trusts and irrevocable trusts, you may be wondering why anyone would choose the latter, right? Believe it or not, there are still some benefits to choosing an irrevocable trust, such as:
Benefit from access to governmental programs. As we age, we want to be able to participate in government programs like everyone else. However, many of these programs have strict income requirements. While you may have money in your estate, it may or may not be enough to carry you through the end of your life. If it disqualifies you from getting help, putting your assets in an irrevocable trust reduces your assets and can make you eligible. This is also commonly used for those with disabilities.
Avoid lawsuits. Remember, when you put your assets in an irrevocable trust, they are no longer yours. This makes you less enticing for a lawsuit – and it also protects your assets should you actually become subject to a lawsuit. Nobody can go after those assets that are protected by the trust.
Minimize the amount of estate tax you’re liable for. Estate tax can be exorbitant. When you die, these taxes can take a big chunk of what is left for your loved ones. However, any assets listed as part of your irrevocable trust cannot be taxed when you die.
Key Takeaways
Choosing to place your assets into a trust should be based on your reason for doing so in the first place – and what control you want to maintain. There are very distinguishable characteristics between irrevocable and revocable trusts. Let’s take a look at a few of the main key points:
- Revocable trusts can be changed and canceled at any time. Irrevocable trusts cannot.
- You remain in legal control of your assets in a revocable trust, but you lose control when placed in an irrevocable trust.
- Most people use a revocable trust to avoid probate and they often use an irrevocable trust to avoid heavy estate tax.
- An irrevocable trust offers protection from lawsuits and creditors while a revocable trust does not.
Which is Best for You?
If you are considering the creation of a trust, it is best to speak to an attorney. This article offers the basics of each of these types of trusts, but an attorney will be able to review your assets and discuss your wishes and concerns.
There are pros and cons to both irrevocable trusts and revocable trusts. You don’t want to make decisions concerning your future without looking at every angle. Contact an attorney today and uncover the trust that works best for you.
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