Creating a trust is one of the most effective ways to protect your assets as part of a thorough estate plan. There are two main types of trusts: irrevocable and revocable. By discussing the differences between these two types of trusts, you can better understand how using a trust as part of your estate plan can benefit you and your loved ones.
The team of Pittsburgh attorneys at Jones Gregg Creehan & Gerace can help you with any of your probate or estate planning needs. If you have questions about the differences between irrevocable and revocable trusts, we can answer them and help you understand the best option. We are available to answer your questions and help you achieve your estate planning goals. Contact us as soon as possible to schedule your initial consultation.
Revocable Living Trusts
Revocable living trusts are the most common types of trusts used in a safe landing. Also called inter vivos trusts, revocable trusts are frequently used because they allow the creator, or grantor, to change the trust or revoke it entirely during his or her lifetime. When you create a revocable living trust, you can alter the instructions for how your assets should be handled. You can also add or remove assets to and from the trust during your lifetime.
You can even terminate the trust entirely. However, once the grantor dies, the trust will become irrevocable. Revocable trusts are typically used to pass your estate to your children or other beneficiaries without going through the probate process. In a revocable trust, the grantor who creates the trust can also be the trustee responsible for managing the assets in the trust. Once the grantor passes away, another person appointed by the grantor will step into the role of trustee.
As the name suggests, an irrevocable trust cannot be changed once it has been created. After the grantor establishes a trust and decides which assets to transfer into the trust, he or she can’t change the terms of the trust without the permission of the beneficiaries. Additionally, the grantor cannot revoke the trust after it’s been created. The grantor has given up any legal right to the assets transferred into the trust by creating an irrevocable trust. Due to the permanency of irrevocable trusts, they are typically used to remove assets from someone’s estate, helping reduce the size of their estate as a tax planning strategy or to become eligible for Medicaid.
Modifying the Trust
The main difference between a revocable and irrevocable trust relates to the ability to modify the trust. There is typically language in the trust documents that provide the grantor the ability to change, modify, alter, or even fully revoke the trust later with a revocable trust. As the owner of a revocable trust, you can change your mind at any time about what assets you’d like to keep in the trust and when you would like the trust to come to an end.
In contrast, once the documents for an irrevocable trust are signed, witnessed, notarized, and fully funded, the trust cannot be revoked. The language and the trust agreement will indicate that the trust cannot be changed, modified, or altered after it becomes effective. Even if you change your mind later, you won’t be able to modify or revoke the irrevocable trust.
The second key difference between revocable and irrevocable trust relates to the ownership of the property within the trust. With a revocable trust, the trust does technically become the owner of assets that have been transferred into it. However, since it’s revocable, ownership can be changed at any point in time. The person who creates a revocable trust continues to have ownership, or at least control, over the assets in the trust.
With an irrevocable trust, any property transferred into the trust becomes the property of the trust. The person or business who previously owned the assets in an irrevocable trust loses all ownership interest in and control of the property. With an irrevocable trust, once it’s been created and funded, it can’t be changed.
Protection of Assets
Many people choose to create a revocable trust because it gives them flexibility and allows them to maintain control over their assets. One of the key benefits of using an irrevocable trust relates to your ability to better protect the assets in the trust. Irrevocable trusts are far better when it comes to protecting assets than revocable trusts. Assets placed in a revocable trust are typically not protected from creditors.
Alternatively, when property is placed in an irrevocable trust, creditors of the individual who created the trust typically can’t execute against the trust property. Property is truly protected from creditors and outside claims when it is owned by an irrevocable trust.
Federal Estate Tax
Another important difference between irrevocable and revocable trusts relates to federal estate taxes. As of 2022, federal estate taxes will apply to assets over $12.06 million for an individual and $24.12 million for a couple. In other words, an individual or married couple won’t have to pay federal estate tax unless their estate is valued over these amounts. An irrevocable trust can be an effective estate planning tool to help individuals and couples avoid paying federal estate taxes.
A revocable trust will not work for this purpose since the trust can be modified or even revoked. As a result, it can’t be used to avoid paying federal estate taxes. Using an irrevocable trust can help high-net-worth individuals avoid spending millions of dollars in estate taxes after they pass away.
Discuss Trust-Based Estate Planning Goals with An Experienced Attorney
Jones Gregg Creehan & Gerace provides a full range of legal services related to estate planning, including revocable and irrevocable trusts. We’ve served Pittsburgh clients for decades, and our clients can rely on our experience, commitment, and credentials when they turn to us for legal representation. Contact our law firm today to learn more about revocable and irrevocable trusts.