Revocable vs. Irrevocable Trusts

Trusts can benefit almost any estate plan, offering a range of unique legal, personal, and tax-related perks to help you reach your financial goals. When the time comes to create a trust, you must know the difference between two key types: revocable and irrevocable trusts. Here’s an overview of what each trust type entails and how it should be used.

Revocable Trusts

Simply put, revocable trusts (or living trusts) are flexible and changeable. Unlike its counterpart, a revocable trust can be amended by the trust owner at any time.

Let’s say you created a trust several years ago. You would likely have placed assets within the trust, designated beneficiaries to receive the assets, and left instructions about the distribution of the assets. You might also have assigned a trustee to manage the trust and its contents.

Your trust may have been the perfect plan when you first created it, but now that many years have passed, your life has changed in significant ways. Maybe you went through a divorce, someone in your family passed away, or a new child or grandchild has entered your life.

In light of these changes, your trust may not be appropriate anymore. With a revocable trust, you have the option to change the document or revoke it altogether.

You can use revocable trusts to:

  • Let certain types of assets avoid the probate process. They will pass directly to your beneficiaries after you pass away.
  • Keep your family matters private. Because the trust avoids probate, it remains a private document instead of a public record.
  • Plan for the possibility of mental disability. If you should ever become mentally incapacitated, your assets can be managed by the disability trustee you named in the trust.

Irrevocable Trusts

There’s one major drawback to revocable trusts: the assets held in your trust are still considered your personal assets. What does that mean in practice? For one, your trust assets can be seized by creditors if you are sued, and for another, the assets are still subject to state and federal estate taxes after you pass away.

Irrevocable trusts overcome that downside by sheltering your assets from creditors and providing state and federal estate tax protection to your beneficiaries. The trade-off is that once you sign and fund an irrevocable trust the trust assets are irrevocably removed from your estate.

Your irrevocable trust assets are a gift, in trust, to your designated trust beneficiaries, controlled by the trust’s terms and the trust’s trustee(s).

Keep in mind that a revocable trust becomes irrevocable under certain circumstances, like when the trust owner passes away or certain conditions are met. For example, you might set conditions like the death of a loved one or a specific date in the future.

You can use irrevocable trusts to:

  • Make conditional gifts to trust beneficiaries;
  • Shelter assets from creditors in the event of a lawsuit;
  • Protect assets from state and federal estate taxes; and
  • Engage in charitable estate planning.

Establish Your Trust

There’s much more to understand about trusts, including the many sub-categories you can use to customize your estate plan. Contact the law firm of Kevin Forrester for knowledgeable guidance with wills, trusts, and more. We will help you with strategies to meet your estate planning goals and maximize the assets you leave behind for your loved ones.

Share this on...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Email this to someone