There are a myriad of ways to take care of your belongings and assets before you die to ensure they go to the right people and are properly cared for. Wills and trusts are the two most common ways to do this. A will outlines how a person wants their estate to be dealt with after they die and who they want to deal with it. A trust is a fiduciary relationship. It is a legal entity a person establishes during their lifetime to manage their assets after death. A person (trustor) gives another party (the trustee) the right to hold the title to property or other assets for the benefit of a third party (the beneficiary).
In the same way that different types of wills are important and useful for different situations, there are also different types of trusts. Two basic trusts that you need to know about are revocable and irrevocable. Let’s explore what they are, how they are similar, how they are different, and then discuss which is right for you.
Revocable Trust
A revocable trust, also known as a living trust, can be changed or canceled by the trust’s creator (trustor) at any time. The trustor can change beneficiaries or undo the entire trust if they change their mind. The motivation for choosing this type of trust is to maintain control over assets regardless of taxation.
Only after the trustor dies does the property or other assets transfer to the trust’s beneficiaries. A trust requires that a trustee is put in place to manage assets in case of emergency. If the trustor can no longer manage their own assets, the trustee takes over. Given the sensitivity of the information in a trust and the power a trustee has, this person is always someone in whom the trustor places great confidence.
Advantages
If you’re looking for total control over your trust, assets, and estate, a revocable trust may be for you. There are a wide array of advantages to choosing a revocable trust, such as:
- Maintain control over assets after death or mental incapacitation
- Flexibility to make any changes at any time.
- Assets in a revocable trust won’t have to go through Probate Court after you die. Probate is expensive, time-consuming, and will expose your personal financial details to the public.
- You’ll maintain privacy surrounding your estate and property transfers.
- Unlikely to be challenged in court.
Disadvantages
Although revocable trust disadvantages are small in number, they pack a heavy punch. The downsides of this trust involve significant fiscal risk.
- Assets are included in your estate at the time of death. State (depending on the state) and federal estate taxes may be due.
- Assets are not protected from creditors. If you’re sued, trust assets can be taken as collateral.
Irrevocable Trust
An irrevocable trust and the terms it defines are unchangeable and bound by law once the document is signed. There are rare exceptions, but those are few and far between. The primary motivator for choosing this type of trust is to move assets out of your estate. Irrevocable trusts tend to be more difficult to set up and demand the assistance of an estate attorney. If you’d like to learn how to set up an irrevocable trust, call CJB Law.
Advantages
If it requires you to set the terms in stone without knowing what the future has in store, why would you want an irrevocable trust? The advantages of this type of trust outweigh the disadvantages for most folks.
- Trustor no longer legally owns the trust assets, so they cannot be lost to lawsuits or creditors.
- Assets can be moved into the trust in a way that halts capital gains taxes
- Because the trust legally removes the trustor as the owner of assets, state and federal estate taxes can be avoided.
- By putting your assets into an irrevocable charitable trust, you can take a charitable income tax deduction.
Disadvantages
It’s clear that the advantages of this type of trust are many. However, irrevocable trust disadvantages exist, as well. Creating a trust that is legally can’t be changed comes with a number of downsides, such as:
- You relinquish all control over assets in the trust once the document is signed.
- Choose your trustee wisely because they make all the decisions regarding the trust assets if something unexpected happens to you.
- Instead of capital gains taxes, gift taxes may be due.
- If nursing home or other unexpected expenses related to end-of-life care come up, funds in an irrevocable trust can not be accessed.
Can you change a revocable trust to an irrevocable trust?
This is a common question from those wondering which type of trust is right for them, and the answer is, yes, you can change a revocable trust to an irrevocable trust. You have to go through the restatement process to ensure the document is properly structured to be irrevocable.
This can happen automatically if the creator of a revocable trust dies. This way, the trust assets can be properly distributed to those named in the document with no extra fuss or hassle.
Which is Better: Revocable or Irrevocable Trust?
At the end of the day, deciding between a revocable and irrevocable trust depends on the situation and who is involved. If it is essential for you to maintain control over your assets and make sure that someone else can control them if you become mentally disabled, a revocable trust is probably for you. If avoiding taxation is more important to you than remaining in control of your estate, an irrevocable trust is likely the best route for you.
If you feel unsure about the type of trust that’s best for you, call our team of estate planning experts at CJB Law. We will help you parse out the details and take the time to figure out what type of trust will be most beneficial to you and your family. Visit our website to learn more about our areas of practice and schedule your free consultation today.