Revocable Vs Irrevocable Trusts
Trusts are a useful legal tool that many men and women rely on to safely transfer or store assets. However, many people only have a shallow understanding of trusts if any at all. Simply stated, a trust is a legal agreement between three separate parties: A trustor, trustee, and beneficiary.
- A trustor is a person who creates a trust. They place their assets into the trust.
- The trustee receives the responsibility of the trustor’s assets. They also receive instruction for how the trustor would like their property handled.
- A beneficiary receives the benefit of the trust.
There are several different types of trusts, but they all fit into two categories. A trust is either Revocable or irrevocable.
Revocable Living Trusts
A trust that can change at any time is known as a revocable trust. Revocable trusts are also called living trusts or Inter Vivos Trusts. A trustor who has second thoughts about their trust make elect to change the beneficiary and trustee of the trust. When a trustor wishes to change their trust, they fill out a trust amendment. A trustor with a revocable trust can even revoke the entire trust, and their assets will come back into their care.
While the flexibility of revocable trusts is excellent, revocable trusts are not perfect. The most significant downside to revocable trusts is that the assets placed into them are still counted into the trustor’s estate. That means that the property in the trust is considered for your taxes, adds to your total value during a lawsuit, considered for your Medicaid planning, and both the federal and state inheritance tax will apply to the assets
Despite that, revocable trusts still have several situations in which they excel. A few examples include:
- Mental disability planning- A trustor who creates a revocable living trust before becoming mentally incapacitated will have the trustee that they wanted. Without a self-appointed trustee, a court-supervised guardian would be appointed to look after the mentally incapacitated person and their estate.
- To avoid the probate process- Assets in a revocable living trust pass directly to the beneficiary after the trustor’s death. The method allows the assets to skip the probate process entirely.
- To protect the privacy of your estate and beneficiaries- By avoiding the probate court, a trustor keeps their assets secret. By passing the assets down outside of court, they avoid the public record. A revocable living trust is a significantly more secure option when compared to the last will which is admitted into probate and becomes public for anyone to see and read,
An irrevocable trust is a trust that cannot change after the agreement is signed or a revocable trust that is designed to become irrevocable after the trustor dies or after a particular point in time. Most revocable trusts become irrevocable after the trustor dies. There a few ways that an irrevocable trust can be changed, but they are very specific. You should contact an estate planning attorney in Atlanta if you seek to change an irrevocable trust.
Irrevocable have several uses despite their strictness. A few possible uses for them are:
Reducing a trustor’s estate for tax reasons: Unlike revocable trusts, irrevocable trusts are not counted as part of a trustor’s estate. Irrevocable trusts do not count towards an estate because once an asset becomes part of the trust, it can never be retrieved by the trustor. Therefore, irrevocable trusts can be used to transfer assets to trustees and beneficiaries for tax purposes.
Protection of a trustor’s assets: Trusts can also be used to protect a trust maker’s assets. Much like using an irrevocable trust to reduce estate taxes, the assets a trustor places into a trust no long belong to him or her. That makes the assets impossible for a creditor to reach and claim. Assets in an irrevocable trust are also inaccessible for Medicaid planning. The striking aspect of using an irrevocable trust in this manner is that the trustor’s family can be named the beneficiaries of the trust, which allows the assets to continue to provide for the family financially. In some states, self-settled trusts or domestic trusts exist. These types of trusts allow for a trust maker to name his or herself as a beneficiary.
Charitable Estate Planning
Irrevocable trusts are also used to accomplish charitable estate planning. Trusts like these are called charitable remainder trusts or a charitable lead trust. A trustor who places assets in the trust receives a charity tax deduction in the year the transfer is made, or the trustor can create the trust so that it donates the assets in it once he or she passes away and their estate receives a tax reduction.