Revocable vs. Irrevocable Trusts for Estate Planning
Trusts have long provided an estate planning tool for individuals and couples with significant assets who are seeking benefits beyond those offered by a traditional will. However, once you have decided to place your assets in a trust, you must then decide whether a revocable or irrevocable trust will best suit your needs.
In essence, the decision of which form of trust to use comes down to whether you would like to prioritize flexibility over asset protection. A revocable trust can usually be changed or terminated during your lifetime and becomes irrevocable when you pass away, at which point it can no further changes can be made. Placing your assets in an irrevocable trust offers more protection by moving the assets beyond your direct control and usually puts them beyond the reach of creditors and legal judgments.
Unfortunately, while irrevocable trusts usually provide you with better asset protection and tax benefits, determining which type of trust is best for you often involves a more nuanced assessment of your financial and personal situation. In the following sections we will provide you with a more detailed breakdown of the two types of trusts, as well as their advantages and disadvantages.
Trusts Help with Estate Planning
Both revocable and irrevocable trusts are legal entities into which you can transfer your assets to the control of a trustee. You have the option of appointing yourself, a family member, or anyone else as a trustee who has a fiduciary duty to act in the best interests of the trust’s beneficiaries. When you form the trust, you can dictate how the assets are to be managed and distributed to the beneficiaries. It is the trustee’s responsibility to ensure that your wishes are followed.
Trusts will usually help you avoid probate, which is the legal process through which your assets will be distributed to your heirs or the beneficiaries of your will. Probate can be expensive and may delay the distribution of your assets. Additionally, if you own property in several states, your estate may be subject to proceedings in each state.
It should be noted that not everyone needs to establish a trust for estate planning purposes. If you do not have substantial assets that you wish to pass on to your heirs or other beneficiaries, a will may be sufficient. Plus, trusts can get expensive. In addition to hiring an attorney to draw up the trust document, there are usually administrative expenses and the trust may be subject to federal and state taxes.
What are the Pros and Cons of a Revocable Trust?
If you establish a revocable trust, you usually have the option of changing it or terminating it at any point during your lifetime. Once you pass away, the trust becomes irrevocable and no further changes can be made. Common changes to revocable trusts include:
- Adding new beneficiaries or removing existing ones.
- Changing how assets are to be distributed to beneficiaries.
- Transferring assets into or out of the trust.
- Making changes to how the trustee manages the trust’s assets.
The ability to make changes to a revocable trust will allow you to update it if you are concerned about your financial situation changing in the future. It will also allow you to add or remove beneficiaries and alter how the assets are distributed if your family situation changes.
The primary drawback of a revocable trust is that it does not provide much protection from creditors and legal judgments because you retain ownership of the assets. This means a creditor can force you to terminate the trust and turn over its assets.
Additionally, there is often no tax benefit to revocable trusts because the IRS will usually treat the assets held in the trust as part of the grantor’s estate for income and estate tax purposes.
What are the Pros and Cons of an Irrevocable Trust?
If you set up an irrevocable trust during your lifetime, any assets you transfer into the trust must remain in the trust and managed by the trustee under the terms of the trust when it was established. You will not be allowed to change the beneficiaries or how the assets will be distributed to them.
In exchange for giving up control over your assets, an irrevocable trust will protect those assets from creditors or legal judgments against you. This is because you no longer legally own the assets you used to fund the trust or have any control over them. However, if a court finds that you transferred your assets into a trust to avoid creditors, it can find the transfers fraudulent and give your creditors access to the assets.
An irrevocable trust also provides estate tax benefits because it removes assets from the estate and transferred assets do not count toward your estate’s gross value.
Code Accounting Can Help with Estate Planning
The skilled professionals at Code Accounting can help you assess your financial situation and decide which steps you should take to ensure that your estate plan is the one that works best for you. The will you had drawn up years ago may no longer suit your changed personal or financial circumstances and a revocable or irrevocable trust may better serve you.Tags: Estates, irrevocable, planning, revocable, Succession, trusts
Categorised in: Legal, Planning
This post was written by Sean Allaband