First, a trust is a separate legal entity that is set up to hold assets during a person’s lifetime that allows a third party (or trustee), to hold assets on behalf of a beneficiary or beneficiaries.
Thus, a revocable trust (sometimes called a living trust) is a trust in which the terms can be changed at any time.
An irrevocable trust describes a trust that cannot be modified after it is created without the beneficiaries’ consent.
Key Differences Between a Revocable and Irrevocable Trust
Some additional key differences between a revocable and an irrevocable trust is that a grantor can also be the trustee with a revocable trust, but not so with an irrevocable trust. Privacy differs too. Privacy is protected when a revocable trust is set up. This means when the grantor dies, the information in the trust is kept within the family. If you set up an irrevocable trust, documentation of the creation of the trust may be recorded if the estate goes through a legal proceeding.
Revocable Trust vs. Irrevocable Trust Example
For example, let’s take a look at what options exists if an an individual creates a revocable trust to benefit their family and protect their assets vs. if the same individual creates an irrevocable trust to benefit their family and protect their assets:
|Revocable Trust||Irrevocable Trust|
|The individual can be named as the grantor, trustee and beneficiary of a revocable trust;||Not applicable.|
Instead of naming themselves the trustee and beneficiary, the grantor must now carefully vet and designate a trustee and a trust protector who acts as an oversight manager of the trust; giving up ownership and controlling assets, such as property.
|The individual can go back into the trust and name a new beneficiary and/or add a trustee to step in if they become incapacitated in their more senior years; The trust can be amended several times within the trustee’s lifetime, (if the trustee remarries or after the birth of a grandchild).||Not applicable.|
Once assets have been put into an irrevocable trust, the grantor cannot alter the trust unless all beneficiaries agree (or by court order).
It is difficult to change the named beneficiaries in an irrevocable trust. And the grantor may not be able to access their assets, even if a life event makes it necessary.
|When the individual passes, their trust is kept out of probate, and therefore, the stipulations in their trust can be carried out discreetly.||Not applicable.|
Documentation of the creation of the trust may be recorded if the estate goes through a legal proceeding.
Given the flexibility of revocable (living) trusts in contrast with the rigidity of an irrevocable trust, it seems all trusts should be revocable.
What Is a Revocable Trust?
A revocable trust is an estate planning tool that manages the assets of the grantor throughout its life. The trust is private and becomes irrevocable upon the grantor’s death. However, while the grantor is alive, provisions can be altered or canceled depending on the wishes of the grantor or the originator of the trust. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries of the trust.
Revocable Trust Benefits
For many, the lure of a revocable trust is that the grantor can change the terms of the trust or dissolve the trust document at any time. Further, it can bypass probate, which can be a time-consuming and costly process in some states. Bypassing probate also allows the details of the trusts to remain private instead of becoming public record available for anyone to view.
Revocable Trust Disadvantages
Yet potential disadvantages to Revocable Trusts exists and could include:
- No tax advantage: Revocable Trusts don’t save you money on your income taxes or estate taxes;
- No asset protection: While you’re living, a Revocable Trust doesn’t protect your assets from creditors.
- Need for updates: While Wills can automatically update or change after major life events just as birth of a child or divorce, a Revocable Trust need to be consciously updated.
- Administrative work: Retitling assets to be Trust-owned can be time consuming, but necessary to fund a Trust. Not all assets will need to be retitled, though.
What Is an Irrevocable Trust?
An irrevocable trust is an estate planning tool used to move the assets from the grantor’s control and name to that of the beneficiary. This (1) reduces the value of the grantor’s estate in regard to estate taxes and (2) protects the assets from creditors.
It is important to note that some risk is involved, as an Irrevocable trust cannot be modified, amended, or terminated without the permission of the grantor’s beneficiary or by the order of a court (precise rules can vary by state). The grantor, having effectively transferred all ownership of assets into the trust, legally removes all of their rights of ownership to the assets and the trust.
Irrevocable Trust Benefits
Irrevocable trusts offer some great advantages as they are generally and mainly set up to minimize estate taxes, access government benefits, and protect assets. Irrevocable trusts are not subject to estate tax upon death. They also relieve the benefactor of tax responsibility for any income generated by the assets. This can be especially beneficial for those in professions that frequently face lawsuits, such as real estate developers, doctors and lawyers.
Irrevocable Trust Disadvantages
One of the biggest disadvantages of an irrevocable trust is that the terms of an irrevocable trust are set in stone the minute the agreement is signed and except under exceedingly rare circumstances, no changes may be made to an irrevocable trust. Any such alterations would require the full consent of its beneficiaries or by order of the court (the exact rules can depend on state laws).
Another disadvantage is the loss of control over assets. Once signed, you have no control to retrieve or even manage your former assets that you assign to an irrevocable trust. For example. depending on how a trust is established, you may be receiving income from the trust, but if you experience financial difficulty, for which your trust income is insufficient, you cannot access any of your former assets (to sell them for raising the money you need).
Which Type of Trust Is Right for You?
In order to best determine which trust best fits with your estate planning needs, you need to consult with a reputable Orange County trust attorney that is well-versed in trust and financial strategies. Evolution Tax & Legal has certified public accounts and estate planning attorneys that can help you formulate a plan to achieve your estate planning and financial goals. Call us for a free consultation today!