If you are deciding whether to create an irrevocable trust or a revocable trust, it’s important to understand the advantages and disadvantages of both. You should also know how they protect your assets and how they may impact your beneficiaries.
What is an irrevocable trust?
An irrevocable trust is created as an entity separate from the owner of the assets. The owner may designate specific assets, such as property, to be transferred to an irrevocable trust. They may then designate a trustee to oversee the trust and beneficiaries who will be the recipients of assets upon the estate owner’s death.
Once an irrevocable trust is duly created in accordance with the law, it cannot be changed. Beneficiaries may not be added or removed, and any assets designated to be part of the trust cannot be accessed.
Benefits of an Irrevocable Trust
An irrevocable trust is a great asset protection strategy for people in high-risk professions, such as medicine or law, who may find themselves the targets of lawsuits. Any successful lawsuits cannot touch assets held in an irrevocable trust since the ownership of these assets has been fully transferred to the trust itself.
In addition to asset protection, irrevocable trusts also eliminate the potential for estate or inheritance taxes. Assets distributed from an irrevocable trust are entirely protected from taxation, including income generated by assets contained in the trust.
Disadvantages of an Irrevocable Trust
The main disadvantage of an irrevocable trust is that it may not be changed once it is set up. Assets cannot be removed from the trust, and designated beneficiaries may not be modified.
If an irrevocable trust is set up far in the future of an estate owner’s death, this can be a hindrance. Life can change dramatically in just a few years, and the estate owner may find that they no longer agree with the decisions they made in setting up the trust.
What is a revocable trust?
In contrast with an irrevocable trust, a revocable trust may be amended, changed, or modified at any time. While it does involve the transfer of assets, control of the assets remains with the owner. Assets can be added or removed at any time. In addition, beneficiaries can be changed as required.
Benefits of a Revocable Trust
The main advantage of a revocable trust is its flexibility. As stated above, it can be modified at any time according to the wishes of the owner.
If a birth occurs in the family and the trust owner wants to add a new family member as a beneficiary, it is easy to do so. Similarly, if a beneficiary becomes incapacitated before the trust owner, changes to the trust can be made to accommodate the incapacitation.
Disadvantages of a Revocable Trust
While the revocable trust may seem to be the best option upon initial review, it’s important to understand that it does have significant drawbacks. First, assets in a revocable trust are not protected from creditors. Thus, if a lawsuit is filed against the asset owner, assets in the trust may be used to satisfy debts.
In addition, a revocable trust does not provide the tax benefits that an irrevocable trust provides. The estate may still owe estate taxes upon distribution of assets, and beneficiaries may be subject to inheritance taxes.
Deciding Which Type of Trust Is Appropriate for You
Understanding the difference between revocable and irrevocable trusts can be very helpful when setting up an estate planning strategy.
However, before determining the type of trust you believe will be best for you, you should speak with a qualified and knowledgeable attorney. They can work with you to determine your needs, understand the assets that you wish to be held in the trust, and devise an appropriate estate plan. Contact our team today.