Revocable and Irrevocable Trusts: What’s the Difference?
Revocable and Irrevocable Trusts: What’s the Difference?
Living Trusts are trusts that are established during the trustor’s lifetime with property transferred into the trust soon after establishment. There are two main types of trusts: revocable and irrevocable. But what does that mean? What’s the difference between revocable and irrevocable trusts, and which one is better for your family?
Revocable Trust
A revocable trust is one that can be changed or revoked. This gives the trustor (the person creating the trust) a great deal of power and control over the trust and the trust corpus.
What are the advantages of a Revocable Trust?
The advantages of a revocable trust are fairly clear. If a trust can be amended, the trustor does not have to worry if life circumstances change several years after the trust is created.
For example, perhaps the trustor has a falling out with one of the beneficiaries. With a revocable trust, it is very simple to draft a trust amendment and remove that beneficiary from receiving anything from the trust. Likewise, if the relationship is later reconciled, the individual can become a beneficiary once again through an additional trust amendment.
What are the disadvantages of a Revocable Trust?
The biggest disadvantage of a revocable trust is that it does not protect assets from creditors. Anything in a revocable trust is still considered part of the trustor’s estate affecting everything from eligibility for certain types of medical assistance to estate taxes.
Irrevocable Trust
Like a revocable living trust, an irrevocable living trust is created during the trustor’s lifetime. However, an irrevocable living trust cannot be changed by the trustor’s wishes alone. In order to amend or revoke an irrevocable trust, 1) both the trustor and the beneficiaries must agree to do so (or just the beneficiaries if the trustor is deceased) and 2) the court with appropriate jurisdiction must conclude that the proposed amendment or termination would not change the material purpose of the trust.
What are the advantages of an Irrevocable Trust?
The major advantage of an irrevocable living trust is the tax benefit. Assets in an irrevocable trust are removed from your taxable estate because you no longer own them and you have limited control over them
Likewise, because assets in an irrevocable trust are no longer owned by the trustor and cannot be revoked, the trust provides substantial protection from creditors. Creditors cannot seize funds from the trust due to the trustor’s debts or place any type of lien.
What are the disadvantages of an Irrevocable Trust?
The major disadvantage of an irrevocable trust is that the trustor loses a great deal of control over their assets. They cannot change or revoke the trust agreement.
So what type of trust is best for me?
This is not a simple question as everyone’s situation or estate plan is not the same, and both revocable and irrevocable trusts have their advantages. By sitting down and discussing the matter with us, we can better recommend an estate plan that meets the unique needs of you and your family.