Whether you already have a trust and are wondering if it’s the right type for you, or if you are considering setting one up, it’s important to understand the differences between revocable and irrevocable trusts. In addition to making sure the trust fits your needs, there are also tax and legal considerations.
A Revocable Living Trust
Revocable living trusts are also known by several other names: living trust, revocable trust, inter vivos trust. Regardless of which name is used, it denotes a type of trust that you can change anytime you choose. This flexibility offers the following advantages:
- If anyone you named as a beneficiary or trustee passes away, or leaves your life, you can remove or replace them using a trust amendment.
- You can choose to revoke the entire trust and start over using a trust amendment and restatement.
- The contents you specified in the trust can be removed, or added to, or changed in any way using a trust amendment and restatement.
The Advantages of a Revocable Living Trust
There are many reasons why people might choose to create a revocable living trust as part of their estate plan.
- Avoid the probate process. When a person dies, if they have a revocable living trust, assets held by that trust will go directly to the beneficiaries and thus avoid the probate process.
- Privacy protection. Because the probate process becomes a matter of public record, by avoiding it via a revocable living trust, details about the estate’s assets and distribution will remain private.
- Mental disability contingency. If a person becomes mentally incapacitated, their previously designated disability trustee can manage the estate’s assets on their behalf.
An Irrevocable Living Trust
This is a type of trust that under most circumstances cannot be changed after it has been finalized and signed.
The Advantages of an Irrevocable Living Trust
The main reasons why a person may choose irrevocable living trust are:
- Tax benefit. When a person dies, assets contained within an irrevocable living trust are transferred to the trustee and the beneficiaries, thus removing them from the estate. Because the deceased’s estate no longer owns those assets, they cannot be taxed against the estate. An estate planning attorney can establish an irrevocable living trust that is more complex and will split into individual trusts upon the trust maker’s death. This option can offer substantial tax advantages for estates with high-value assets.
- Asset protection. Because the trust maker is turning over control of, and access to, their assets to the irrevocable living trust, the assets cannot be accessed by creditors, either. Though the creditors cannot access the assets, the trust maker’s family can inherit them. An estate planning attorney can set up the irrevocable living trust with asset protection for the trust beneficiaries.
- Charitable estate planning. The trust maker can use an irrevocable living trust to include charities as beneficiaries.
- If the trust maker transfers assets into a charitable trust while alive, they will earn a charitable income tax deduction.
- If the assets are transferred to a charitable trust after they die, their estate will earn a charitable income tax deduction.
Talk to an planning attorney such as the Wills and Trusts Lawyer Scottsdale AZ who can advise you of your options for trusts based on your state’s laws, and your unique situation.
Thanks to authors at Hildebrand Law for their insight into Estate Planning.