Differences Between a Revocable and Irrevocable Trust
If you are considering a trust as part of your estate plan, you likely already know about some of the benefits of these powerful tools. However, there are two main types of trusts you may choose, and your choice can have a big impact on your estate plan. Revocable trusts allow you more control and flexibility over your assets during your lifetime, while irrevocable trusts can give you greater liability protection and tax benefits.
The specific type of trust that you decide to use depends on your personal situation and the goals you want to achieve. In some situations, you might even decide to use a combination of both revocable and irrevocable trusts. Keep reading below to learn the major differences between revocable and irrevocable trusts and how that may affect your estate plan.
What Is a Trust?
A trust is a legal arrangement that creates a fiduciary relationship between a trustee and the beneficiaries of the trust assets. A trust can be used to manage, protect, and distribute property and assets. There are several important parties involved in a trust, such as:
- Grantor: The person who creates the trust and places assets into the trust.
- Trustee: The person responsible for managing the trust and distributing assets. The trustee is typically named by the grantor in the trust documents.
- Beneficiary: Someone who is set to benefit from the trust. Assets or property may be distributed from the trust to a beneficiary according to the terms of the trust documents.
Believe it or not, there are different types of trusts that may be created. Each one offers some unique benefits, but they also each have their own drawbacks. Specialized wills and trusts attorneys in Oklahoma City can help you handle the two main types of trusts you may encounter:
Revocable Trust
Revocable trusts are sometimes called living trusts. This is because a revocable trust is created during your lifetime, and you retain full control over the trust until your death. A revocable trust may be changed or modified at any time, and the grantor typically serves as their own trustee of a revocable trust. Revocable trusts can be beneficial for passing assets, such as real property, to a beneficiary without the need to go through the probate process.
Irrevocable Trust
An irrevocable trust is a trust that generally cannot be modified or terminated without the consent of all the beneficiaries. It might even require a court order in some cases. Assets placed into the trust are the permanent property of the trust, and the trustee has full authority to manage those assets according to the terms of the trust document. Assets placed into the trust are no longer under the control of the grantor, and this type of trust can offer substantial tax and liability benefits.
Major Differences Between Revocable and Irrevocable Trusts
Understanding the differences between revocable and irrevocable trusts is critical to deciding which one of these tools is best for you. Here are some of the major differences you should be aware of:
Flexibility and Control
Revocable trusts offer flexibility and control over your assets, while irrevocable trusts do not. You can modify or terminate a revocable trust at any time. Essentially, this means that you retain full control over the assets that are in the trust. Irrevocable trusts do not offer this benefit. Irrevocable trusts generally cannot be modified or terminated, and assets placed into the trust are there permanently. Those assets are no longer owned by you individually, and the trustee then has control over those assets.
Estate Tax Implications
Taxation is another major difference between a revocable and irrevocable trust. Generally, assets included in a revocable trust are still included as part of your taxable estate. This means that the overall tax burden of your estate is not reduced at all. However, when done properly, irrevocable trusts can be used to remove assets from your taxable estate. This can have a substantial effect on your tax burden, and it could save your family a significant amount of money.
Asset Protection from Creditors
Revocable trusts generally do not protect your assets from creditors during your lifetime. This means that assets held in the trust may still be reached by creditors, judgements, or other personal liabilities. However, irrevocable trusts can offer some asset protection when used properly. However, the timing of the asset transfers makes a huge difference. If you create an irrevocable trust after a judgement has been rendered, then even the irrevocable trust will typically not provide protection in that case.
Long-Term Care Planning
Long-term care planning and Medicaid availability are often big concerns for many individuals. Assets in a revocable trust are usually still considered personal assets for the purposes of long-term care planning. An irrevocable trust, however, might be used to remove those assets from your personal ownership and prevent them from being counted toward long-term care benefits.
Which Is Better: Revocable Trust or Irrevocable Trust?
There is no single, correct answer to this question. One trust is not inherently better than the other. However, they serve different purposes and offer different advantages. The type of trust that is best for you is the one that helps you meet your goals and protect your family. That depends on your personal situation and the tradeoffs you are willing to make.
Many individuals decide that a combination of both a revocable and irrevocable trust offers them the best solution. This allows you to maintain flexibility and control over some assets while also getting tax benefits on other assets. When you begin to consider whether you need a revocable or irrevocable trust, you should consult with an experienced lawyer who can help you understand the implications of your decision.
The team at Helton Law Firm can help you understand all of your legal options and help you develop a plan to care for your family and protect your legacy. Contact us today to schedule an initial consultation with an estate planning attorney who will take the time to understand your personal situation along with your goals and wishes. Give us a call today to learn more about your legal options and let us help you move forward confidently.
