When you enter the world of estate planning, the options and jargon can feel like you are stepping onto another planet. It is important, however, that you understand at least the basics and what the various estate planning tools can offer you and your plans for the future. Take trusts, for instance. These are valuable estate planning tools, but come in many different forms. To help you get a better idea of how they may serve your goals, let’s take a look at the fundamental differences between the two central types of trusts: revocable and irrevocable.
Understanding the Differences Between Revocable and Irrevocable Trusts
A trust is a separate legal entity a trust settlor establishes to hold their assets. They are established during the settlor’s lifetime and are managed by the named trustee for the benefit of the named trust beneficiaries according to the terms set forth in the governing trust document. The two main types of trusts are revocable and irrevocable trusts. Both have distinct qualities about them and can serve different purposes.
The main distinguishing quality of a revocable trust is that the owner of a revocable trust is able to change the trust terms at any time. This makes a revocable trust a flexible option. The owner can add or remove beneficiaries. The owner can also change the governing terms of the trust to alter how the trust should be managed and to what purpose.
Irrevocable trusts, on the other hand, are rigid in the way that, one they are established, they are next to impossible to change. It is exceedingly rare for an owner of an irrevocable trust to be able to alter, amend, or terminate the trust. Any changes to an irrevocable trust requires total consent among all of the trust beneficiaries or require a court order. This is no small feat.
When you consider how rigid irrevocable trusts are and how flexible revocable trusts are, it is difficult to see why anyone would choose to establish an irrevocable trust over a revocable trust. Well, the trade off in flexible comes with a number of benefits that are unique to irrevocable trusts. For instance, a revocable trust may be flexible, but the fact that the trust owner retains such control over the trust means a few different things. First, it means that assets held in the trust are not shielded from the trust owner’s creditors. If the trust owner is sued, trust assets may be ordered to be liquidated to satisfy the judgment. Furthermore, revocable trust assets will be subject to both state and federal estate taxes upon the death of the trust owner.
The inflexible barriers set forth by an irrevocable trust provides a number of protections. Irrevocable trust assets are shielded from creditors. They also provide a number of tax benefits. Assets held in an irrevocable trust are removed from the trust owner’s taxable estate and, thus, are not subject to estate taxes upon the trust owner’s death. The trust owner will also avoid tax liability for any income that is generated by the assets held in the irrevocable trust.
Estate Planning Attorneys
Still unsure about what type of trust might be best for you? Talk to the knowledgeable team at Jones, Gregg, Creehan & Gerace. Contact us today.