Trusts 101 Series: Difference Between Revocable and Irrevocable Trusts
Trusts are a sound piece of an estate plan and are not only meant for the very wealthy.
Creating a trust for your estate plan may seem complicated, but with learning and a little savoir faire you too can use this widespread tool to create the generational wealth you envision for your family.
It takes two
Some can make understanding trusts more convoluted than it needs to be. I’m going to enlighten you here - You only need to remember (for now) that there are two types of trusts. Two, I say. Now, don’t get me wrong, there are various, let’s say, sub-trusts. But for this post, remember TWO and you well ahead of the game.
Sorry, but I have to go here but only for a moment. You may read a bit of legalese. I know, right, don’t be surprised; I’m still an attorney. It is essential to lay the foundation in understanding some basic terms; then you can go out into the world and impress your friends and family with your newfound knowledge.
Revocable Trust
The first is a revocable trust, which is the most common type of trust. You may have heard this type of trust called a living trust or revocable living trust. All these terms can be used interchangeably, but all are the same type of trust.
The revocable trust is the “you can change it trust.” Yes, you create it, you can amend/change it, or you can dissolve it. Here are the reasons why this type of trust is the most popular:
Easy to create while you are still living.
You change the instructions or directions in the trusts.
You have the right to move assets in and out of the trust.
You can terminate the trust at any time.
In addition to the above, there are still more reasons why this type of trust is a valuable tool to include in your plan.
The trust provides families the opportunity to disperse assets in ways that would be extremely difficult to do with a will.
Some families’ goal is to avoid probate. A trust is exempt from the probate process. Big Bonus.
The creator of the trust, you, has essentially simplified and accelerated the estate planning process for your family in many ways.
Assets placed in a trust are also usually exempt from creditors and legal judgments.
Dispersion of assets to beneficiaries is strictly confidential and not published in the public records of probate courts.
A revocable trust is a flexible tool that is up for consideration for all my planning with clients. Sometimes it doesn’t make sense to include, but is constantly under review on whether or not it will get you to your goal.
Irrevocable Trust
An Irrevocable Trust, the “you cannot change it trust.” This type of trust allows the transfer of ownership of your assets into the trust. You would legally remove all of your rights of ownership to the asset and the trust.
INSIGHT! Say what!? No changing it, no ownership, but there is an exception. Read on.
Here’s what you can expect from an irrevocable trust plan:
A little more complex to establish.
You cannot change the instructions or directions in the trusts.
You do not have the right to move assets in and out of the trust.
You cannot terminate the trust at any time.
Remember, the irrevocable trust cannot be modified, amended, or terminated without …(here’s the exception) the beneficiary’s permission. Yeah, I bet you didn’t see that coming.
So why would you want to create an irrevocable trust that seemingly gives up so much control over your assets? Here are some of the reasons why families use irrevocable trusts in their estate planning:
Tax planning. Once ownership is removed, families get some relief from the income taxes. Yay!
Controls. People still get to create parameters around the assets. Suppose a child is a beneficiary, and you don’t want to put an investment in their name. You place it in the trust, thereby controlling the how and when the child may get funds.
Estate Tax Savings. Once in the irrevocable trust, the assets are removed from your estate, and your heirs would be exempt from paying estate taxes, which can be a whopping 40%.
Medicaid Planning. People planning for government benefits, whether elderly or a special needs family member; depending on the circumstances, too many assets in the individual’s name could exclude them from receiving benefits.
Asset protection. People in high-risk professions, like doctors and attorneys, could create an irrevocable trust for asset preservation.
Now that you have this info, how might a trust be helpful in your estate planning? Leave a comment below.
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~ Tenicia Moulden
Moulden Law Blog is made available by the lawyer for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site, you understand that there is no attorney-client relationship between you and Moulden Law. Moulden Law should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
