09/26/2023
Revocable Trust vs Irrevocable Trust
Ultimately, you should consider whether your primary goal is to protect your assets or to retain the flexibility to manage them as you see fit.
Revocable trusts are easier to set up than irrevocable trusts.
Revocable Trust
A Revocable Trust is also referred to as a Living Trust or a Revocable Living Trust or as Inter-Vivos Trust.
When you create a Revocable Trust, you are called the Grantor.
Revocable Trust Pros
• Keeps estate out of probate as long as all assets are funded to the Trust.
• Designed to essentially retain complete control over your assets held within the trust throughout your lifetime.
• You can name yourself as the trustee but should also select a successor trustee who takes charge after your death or in case of your incapacity in line with the conditions outlined in the trust.
• You transfer legal ownership of your property into the trust and the trust becomes the legal owner.
• Property Transfer Deeds ('Grant Deed to a Revocable Trust’ with 'Quitclaim Deeds' utilized for the same purpose) are necessary to formally shift the ownership of property from you, the individual, to you, the trustee of your trust.
• You can modify or change the trust terms whenever you want, say if the trustee remarries or after the birth of a grandchild. You can use or sell the assets as long as the grantor is mentally competent at the time of the decision.
• If you follow the correct processes (such as creating a trust well in advance), the assets held within your trust may not count when determining if you are eligible to have Medicaid pay for nursing home care for you.
• If the beneficiaries of a revocable trust are young (not of legal age) and the minor's real estate assets are held within a trust, it can replace the need to appoint a conservator, should the grantor die.
• If a grantor names beneficiaries who they deem unreliable with money, the trust can set aside a specific amount to be distributed at recurring intervals, or when they come of age (if they are minors).
• 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 to be carried out discreetly.
Revocable Trust Cons
• The fact you retain control over assets means you can lose them to creditors.
• If sued, the trust assets can be ordered liquidated to satisfy any judgment put forth.
• A trust must be funded, and assets must be moved into the trust, which can also be costly.
• The assets in the trust are considered the grantor’s property and must be filed with their income taxes.
• When the owner of a revocable trust dies, the assets held in trust are also subject to state and federal taxes.
• While your revocable trust assets pass outside of probate, they are generally still considered part of your taxable estate and as a result, it is possible estate tax will have to be paid on them.
Irrevocable Trusts
On the other hand, an irrevocable living trust can’t be altered or revoked by the grantor without the permission of the beneficiaries.
• Irrevocable trusts offer tax-shelter benefits to benefit their family that revocable trusts do not.
• Irrevocable trusts may be good for individuals whose jobs may make them at higher risk of a lawsuit.
• Irrevocable trusts remove the benefactor's taxable estate assets, meaning they are not subject to estate tax upon death.
• They also relieve the benefactor of tax responsibility for any income generated by the assets.
Irrevocable Trusts Cons
• The grantor must designate a separate trustee and feel secure giving up ownership and controlling assets, such as property.
• They will now have to carefully vet a trustee and a trust protector who acts as an oversight manager of the trust.
• Irrevocable trusts can be difficult to set up and require the help of a qualified trust attorney.
• 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.
• Additional tax returns may need to be filed for the irrevocable trust, which can add cost and complexity.
