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What is the Difference Between Revocable and Irrevocable Trusts?

October 14, 2021

Are you familiar with revocable and irrevocable trusts in estate planning? Here’s a look at what these types of trusts entail.

Although dozens of types of trusts exist, the four most common are revocable, irrevocable, testamentary, and charitable trusts. While each has the same “three-parties plus assets” structure, they often serve different purposes, may go into effect at different times, and offer diverse benefits. In this blog, we discuss the difference between revocable trusts and irrevocable trusts.

Types of Trusts

  1. Revocable trusts- A revocable trust (aka, a “living trust”) is one that goes into effect while upon its execution. In other words, you, the grantor, create the trust and give the trustee immediate responsibility for managing the assets during your lifetime. Upon your death, the assets directly pass to the beneficiaries according to the trust’s terms.

    The main benefit of a revocable trust is the grantor’s ability to retain control over it. You have the right to change or revoke the trust at any point in your lifetime and may appoint yourself trustee of the trust’s assets. Such authority ensures that you may manage and invest the assets until you become incapacitated or die. If you become incapacitated, a successor trustee will take over your responsibilities until you recover or pass away.

    The revocable trust is also appealing because its assets aren’t subject to probate, the court process of validating a will after the grantor’s death. Probate can be both lengthy and complicated, and cause delays in the flow of assets to the beneficiaries. By contrast, trust assets pass directly to the beneficiaries upon the death of the grantor. This direct flow can help to ensure that the beneficiary has no interruption in their lifestyle or difficulty paying creditors. In addition, because the trust doesn’t pass through probate, its terms do not become a matter of public record. Your family is thus able to maintain its privacy.
  2. Irrevocable trusts- An irrevocable trust is one where the terms cannot be altered, amended, or revoked. The grantor permanently gives up ownership of any assets transferred to the trust. Only in rare circumstances and with the express permission of all beneficiaries may a grantor change these terms.

    The main advantage of an irrevocable trust is its tax benefits. Because the grantor has given up ownership of the assets, the property is no longer part of the grantor’s taxable estate. The grantor is thus relieved from tax liability for any income the assets might generate during her lifetime, and the assets are not included as part of the grantor’s taxable estate after the grantor’s death. Although technically a grantor may serve as a trustee of their irrevocable trust, most lawyers strongly advise against it because it could expose the grantor or estate to tax liability, defeating the primary benefit of the trust.

    An irrevocable trust can go into effect during the grantor’s lifetime (a living trust) or after the grantor’s death (a testamentary trust). An irrevocable living trust does not have to go through probate, providing a compelling advantage over an irrevocable testamentary trust, which does.

    Irrevocable trusts are generally attractive to high net-worth individuals looking to reduce their estate taxes. It’s also a form favored by professionals vulnerable to lawsuits, such as doctors or lawyers. When a grantor irrevocably transfers assets to a trust, the property remains safe from the reach of creditors or lawsuits because they belong to the trust, not the grantor.

    The disadvantage of the irrevocable trust is that the grantor loses both legal ownership and control over the assets. If you have a change in relationship with a beneficiary or later need income from the assets, it can be difficult to accept that the trust may not be changed.

Don’t forget to check out our blog which covers the basics of trusts and how they can benefit your financial situation.

Questions? Contact us today.

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