What is the Difference Between Revocable & Irrevocable Trusts?
Trusts are tools that can be used as part of your estate planning process to help you minimize taxes and maximize the amount of your estate left to your heirs. There are different kinds of trusts, and it is important to know the differences between them, how and why they are used, and the tax consequences of each.
There are many different types of trusts, but they all fall into two broad categories, revocable and irrevocable trusts.
What is a trust?
Before deciding which type of trust is right for you, you need to know what a trust is and what it is used for. A trust is a financial vehicle used to hold property or assets. Trusts are usually set up for a particular purpose and/or for the benefit of specific people. The person who funds the trust by transferring property or assets into it is called the grantor. The person who receives the benefit of the trust is called the beneficiary. The person who is in charge of the trust is called the trustee.
A revocable trust is a trust that can be revoked at any time. In other words, the grantor remains in control of the trust and the assets within it and can change or eliminate the trust at any time. Revocable trusts are used most often when you want to retain the ability to remove the assets from the trust if you think you may need those assets in the future, if you want the ability to alter provisions, or change the trustee or the beneficiaries at a later date.
Since the property and assets in a revocable trust still belong to you and are within your control, these assets will be subject to estate taxes when you die. If you do not have assets that approach the federal estate tax exemption, you may choose a revocable trust simply because those assets will not be sufficient to require payment of federal estate tax. (But check your state tax laws as well, since these thresholds may be different than those for federal estate taxes).
Revocable trusts can be a good way to avoid probate. Since the assets will have already been transferred to the trust before your death, these assets will not need to go through probate. Even if you have other assets that require probate, the assets in the revocable trust can help beneficiaries meet expenses until the probate process has been completed.
Assets in a revocable trust will also be counted towards a bankruptcy, on a Medicaid application, or may be accessed by creditors, for example, if there is a legal judgment against you.
Many estate plans call for irrevocable trusts to be automatically converted to irrevocable trusts once the grantor passes away or becomes incompetent.
An irrevocable trust is the opposite of a revocable trust. An irrevocable trust, once created, cannot be changed or eliminated by the grantor. Once assets are placed within an irrevocable trust, it is like giving them away. As soon as the transfer is completed, you are no longer the owner of those assets, and you do not have control over them; the assets belong to the trust and control is given over to the trustee.
Although you no longer have access to assets placed in an irrevocable trust, those assets also can no longer be reached by your creditors, and they are not counted as part of your estate for estate tax purposes. Assets in an irrevocable trust also do not count for Medicaid planning. In this way, assets can be used for the benefit of your family members as beneficiaries, without the danger that they can be taken by creditors or used up for end of life healthcare costs.
Irrevocable trusts can also be used for charitable estate planning. As the grantor, you receive a tax benefit at the time the assets are transferred, either during your lifetime or, if the transfer does not occur until after your death, your estate will receive an estate tax benefit.
Trusts can save you and your heirs/beneficiaries probate costs and estate taxes, but there are costs involved in setting up and maintaining these trusts. You should work with your accountant and/or tax attorney, as well as an estate planning lawyer, to decide whether to set up a trust, and which type of trust is right for you. To find the right attorney to help you with decisions about trusts, estate planning needs or tax issues relating to trusts, summarize your legal problem on our site to locate a qualified attorney in your area.
Do You Need An Attorney?
If so, post a short summary of your legal needs to our site and let attorneys submit applications to fulfill those needs. No time wasted, no hassle, no confusion, no cost.