Revocable and Irrevocable Trusts: Understanding the Distinctions
Revocable and Irrevocable Trusts: Understanding the Distinctions
Living Trusts are trusts that individuals establish during their lifetime, typically transferring property into the trust shortly after its creation. These trusts fall into two primary categories: revocable and irrevocable. But what do these terms signify? What sets revocable and irrevocable trusts apart, and which one aligns better with your family's needs?
Revocable Trust
A revocable trust is one that can be modified or revoked at the discretion of the trustor, the person creating the trust. This flexibility grants the trustor significant authority and control over both the trust and its assets.
Advantages of a Revocable Trust:
The advantages of a revocable trust are straightforward. Since it can be amended, the trustor need not worry if circumstances change significantly years after its creation. For instance, if a dispute arises with one of the beneficiaries, the trustor can easily draft a trust amendment to exclude that individual from receiving assets. Similarly, if relationships are later mended, the individual can be reinstated as a beneficiary through an additional trust amendment.
Disadvantages of a Revocable Trust:
The primary drawback of a revocable trust is that it does not shield assets from creditors. Anything held in a revocable trust is still considered part of the trustor’s estate, impacting factors like eligibility for specific medical assistance programs and estate taxes.
Irrevocable Trust
Similar to a revocable living trust, an irrevocable living trust is established during the trustor’s lifetime. However, an irrevocable trust cannot be altered solely at the trustor’s discretion. To amend or revoke it, both the trustor and beneficiaries must agree (or just the beneficiaries if the trustor has passed away), and the court with the appropriate jurisdiction must determine that the proposed changes wouldn’t fundamentally alter the trust’s intended purpose.
Advantages of an Irrevocable Trust:
The primary advantage of an irrevocable living trust lies in tax benefits. Assets placed within an irrevocable trust are no longer part of your taxable estate because you no longer own or have extensive control over them. Moreover, this trust provides robust protection against creditors, preventing them from seizing trust assets to satisfy the trustor’s debts or imposing liens.
Disadvantages of an Irrevocable Trust:
The significant downside of an irrevocable trust is the loss of control over assets. Trustors cannot freely modify or revoke the trust agreement.
Selecting the Right Trust for You
Determining the ideal trust type is not a straightforward decision, as each person’s situation and estate plan are unique. Both revocable and irrevocable trusts offer distinct advantages. By engaging in a discussion with us, we can better guide you toward an estate plan that aligns with the specific needs of you and your family.