Wondering what the difference between a revocable and irrevocable trust is? Check out this comparison guide.
Estate planning is a highly personal process; consequently, many people opt to use a trust, as opposed to a will, as the main vehicle for transferring their assets. Trusts are customizable, offer privacy, and avoid the time and expense of probate court. Using a trust is a guaranteed way to pass on your assets and specify how you would like those assets to be used. Although you can use a trust as your only estate planning tool, you can also use one complementary to a will.
What you need to know is that all trusts are legal entities used to manage and transfer your assets. When you open a trust, you fund it with assets and designate how you would like those assets passed on. Trusts are a unique estate planning tool in that the owner of the trust does not have to die in order for assets to be transferred—trusts can go into effect during their lifetime or in the case of incapacitation. There are several different types of trusts, but generally speaking, all trusts fall into one of two categories: revocable or irrevocable.
- Revocable Trust: also known as a living trust or living revocable trust. A revocable trust is a legal document detailing your estate plan. It can be modified as necessary.
- Irrevocable Trust: as the name suggests, an irrevocable trust is a legal document that outlines your estate plan, but, unlike a revocable trust, it cannot be amended—except under extreme circumstances.
Trusts are set up and funded by the grantor, the person who has assets to transfer. They are managed by a trustee, who ensures that the terms of the trust are met as specified by the grantor. Sometimes, the trustee can be the grantor (revocable trust only), but the trustee can also be another person or a corporate trustee, such as Trust Point. The beneficiary receives the assets at the designated time—whether that is upon death of the grantor or during the grantor’s lifetime. Let’s take a look at some of the benefits and limitations of these two different types of trusts.
Revocable Trusts: Pros
The benefit of using a revocable trust is that it offers a very high level of flexibility. The grantor, or owner of the trust, can change the terms of the trust or even dissolve it whenever they’d like. They can add, change or remove beneficiaries. They can change any specifications around how assets are to be used. Basically, anything the grantor would like to change is allowable with a revocable trust.
When the grantor passes, their assets do not go through probate, meaning they save the beneficiaries from time and expense while assets are tied up in the legal system. Because transfers bypass probate, all asset transfers remain private.
An irrevocable trust must be set up with an estate lawyer or law firm that specializes in these trusts. It cannot be changed except for extreme circumstances and requires all beneficiaries to agree to the change.
You might wonder why a person would open an irrevocable trust as opposed to a revocable trust. And the main reason is that irrevocable trusts offer some important tax benefits. The grantor does not need to pay estate taxes on the assets held in trust, nor do they pay income taxes on assets in trust. Additionally, irrevocable trusts are helpful for people who work in fields where lawsuits are frequent, such as the medical or legal fields. Assets held in trust are protected and are not able to be liquidated in the event of a lawsuit.
Revocable Trusts: Cons
The main limitation to a revocable trust is that there are no tax benefits, and your assets are not protected from creditors or legal recourse from a lawsuit. While you can change the terms of a revocable trust, it does come at a cost.
The biggest consideration for an irrevocable trust is, of course, the permanence of this type of estate plan. It is almost impossible to change once it is signed. Additionally, the assets that you place in trust are no longer yours (this is why you do not have to pay estate or income taxes), and are property of the trust.
Your Trusted Trustee
At Trust Point, we have served our clients as their trustee for over a century. Our team is dedicated to helping you establish and maintain your trust to ensure your family and legacy is protected in the future. Visit our Trust Services page to get started.