Revocable or Irrevocable – Which Trust Type is Best for You?

Trusts are valuable to many as estate planning tools and for tax advantaged treatment and protection of assets. The two basic types of trusts are based on whether they are revocable or irrevocable in their structure. This material should help you to understand the basic differences between the two and which may best suit your purposesi.

The Revocable Trust – Benefits and Disadvantages

The IRS defines a revocable trust this way: “A revocable trust is a living trust that can be changed or canceled as desired by the person or persons who created the trust.ii

The revocable trust could be a good option for those who want to maintain some level of control over the estate and assets in the trust. Upon your death, the revocable trust immediately becomes irrevocable. Benefits of a revocable trust include:

  • The revocable trust is flexible, in that you can amend them as necessary, and this can be easier than changing a will.

  • The trust enjoys continuous management, in that the assets will continue to be managed even if you become incapacitated.

  • They avoid probate. Because revocable trusts do not go through probate, an original will is not required for validation during the probate process.

The main benefit is the continued availability of the assets for your care if you become incapacitated.

There are some disadvantages of the revocable trust, including:

  • You receive no income tax advantages from the formation or management of a revocable trust.

  • As long as you are living, your assets in a revocable trust are not protected against creditors.

  • In the funding of a trust, many assets must be retitled, an expense and time-consuming.

  • A trust does not automatically update when major life changes occur, such as births or deaths. They must be consciously updated.

There are distinct advantages of a revocable trust that could meet your needs, but also consider the irrevocable trust information that follows.

The Irrevocable Trust – Benefits and Disadvantages

Starting again with the IRS definition: “An irrevocable trust is a trust that cannot be changed or canceled. To break it down, a trust is a financial relationship where a trustor or grantor gives a second party called a trustee the right to hold assets for the benefit of a third party referred to as a beneficiary, and irrevocable means unable to be revoked or canceled. These trusts come in a range of forms and offer a number of benefits.iii

The irrevocable trust cannot be easily changed or terminated once it is formed and signed. There are however, a highly limited instances when they can be modified, but only with the approval of the named beneficiaries. Benefits of the irrevocable trusts include:

  • Placing assets and property into an irrevocable trust removes them from an estate for taxation and probate.

  • The irrevocable trust can protect assets from judgements and the actions of creditors, a valuable benefit for those who may be the target of lawsuits.

  • You do not lose access to government benefits. Placing assets into an irrevocable trust can reduce your wealth for qualification for Social Security and Medicare benefits.

Along with advantages always come some disadvantages, including:

  • Because the assets in the irrevocable trust are taxes separately from other personal and business assets, they can be subject to higher tax rates.

  • Along with that separate taxation comes a separate tax return.

  • The language and terms of these trusts can be difficult to understand.

Once you know and can clearly set out your wishes, the irrevocable trust can be the right vehicle to do so and a tax saver as well.

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