Posted on: 17 July 2023Share
Trusts are an important estate planning tool. They achieve a range of goals, but they can also be confusing. To help you choose and use a trust to your best advantage, here's what you need to know about revocable and irrevocable trusts.
What Is a Revocable Trust?
Revocable trusts are those whose terms can be changed after they begin. They're often referred to as living trusts or living revocable trusts. This is due to the fact that they are established while the grantor/trustee is living and can be revoked (terminated) at any time by that person.
For estate planning, revocable trusts are relatively easy tools to keep assets out of probate when a person passes. They protect privacy and ensure that the beneficiaries of the trust have continuity of care.
What Is an Irrevocable Trust?
As its name indicates, an irrevocable trust cannot be changed once it starts. The trustee — first the grantor and then the successor trustee — can only manage or distribute the trust as its original terms indicate. Revocable living trusts become irrevocable trusts when the grantor who funded them passes away. At that point, no further changes can be made.
What Distinguishes Both Types?
The good news is that both trusts provide some of the same benefits. They both transfer assets that are in the trust to the beneficiaries outside of probate. This protects privacy, reduces probate costs, and simplifies the inheritance process. In addition, both types of trust protect the grantor's privacy by distancing assets from the person.
However, revocable trusts are still considered assets of the grantor. Creditors can go after revocable trust assets to satisfy debts if necessary. And the grantor will owe taxes on trust income as part of their personal tax bill. Irrevocable trusts are separate entities from the person for legal and financial purposes.
When Should You Use Each?
As mentioned, the right trust depends on your goals. If you want to reduce your personal tax bill or guarantee that an asset won't be seized for other debts, you may need an irrevocable trust. Want to protect different business assets, such as rental units, or protect the assets of someone with special needs? You may want an irrevocable trust.
On the other hand, a living trust ensures you maintain control over your assets while alive. But it still protects them and provides a seamless transition for your heirs after you pass away. If your goal is just to avoid probate, revocable trusts may be all you need.
Where Can You Start?
Start by learning more about the types of trusts available to you in your home state. Meet with an estate planning attorney today to learn more.