Differences Between a Revocable and Irrevocable Trust in Estate Planning
Estate planning is a very critical affair in everyone’s life, one which should be giving due critical attention and care. Which estate planning is flexible and easily amendable, you need to understand that having an irrevocable trust in your estate plan means that whatever assets you put into that trust can never be used by you to your own benefit ever again. Regardless of that, very often we find clients who wish to take assets completely out of their estate for a number of reasons, like reducing their estate value below the tax exemption threshold of $5.25 million. Otherwise, an revocable trust may just be the right instrument for you. As far as it gets, knowing what trust to use in your wealth transfer boils down to knowing what both kinds of trusts entails, their differences and what purpose they each accomplish.
A revocable trust is also most often called a revocable living trust or a living trust. As the name suggests, this is a kind of trust which can be revoked or changed, and as well takes effect during the lifetime of the creator (trustor/grantor). A revocable trust is different from a testamentary trust which is created by the terms of a will.
A revocable living trust can be changed at anytime so long the trustor is still alive. This gives revocable trusts an edge over irrevocable trusts, since an individual may later have second thoughts or situations which warrants a change in the terms of trust, or in the names of beneficiaries in the trust. The trust can be altogether cancelled and all the assets re-titled to your name should you desire to use another form of estate plan instead.
As a grantor, you can name yourself the trustee of your revocable living trust and maintain full control over the trust assets until your death, but you also have to name a successor trustee who would take over handling of the trust assets.
Benefits of a revocable living trust
- It can easily be altered or revoked whenever you so desire.
- It allows you to plan for mental disability, allowing your successor trustee to handle your estate when you become unable to do so yourself.
- Just as with the irrevocable trust, the revocable trust also avoids probate along with its publicity and expenses.
- Your property passes down to your beneficiaries privately without public notice.
- Since the assets transferred to the revocable trust can still be reclaimed by you, they are still considered yours and so would be subject to estate taxes.
- It offers no protection for your assets as an irrevocable trust does. They can make you ineligible for Medicaid.
These trusts are permanent unless for a few very rare occasions. Once an asset is transferred into an irrevocable trust, you can never reclaim it. It becomes a permanent property of the trust and cannot be used by you, or counted as a part of your estate.
Upsides of an irrevocable living trust
- Estate tax avoidance
All assets in your irrevocable trust will not be counted as yours, and so will not be taken as part of your estate. Therefore when taxes are imposed on your estate, those assets in the trust are exempted. Currently in New York, if your estate values over $5.85 million, estate taxes will be imposed. But when you reduce the value below this threshold by transferring some assets into an irrevocable trust, you completely avoid the estate tax.
- Qualifying for government assistance
When you transfer all your property into an irrevocable trust, it means you no longer have any property and this will help you qualify for Medicaid.
- Asset protection
As opposed to revocable trusts, irrevocable trusts protects your assets from the reach of creditors since those assets are no longer yours.
- Once created and funded, your actions can never be undone
- You can’t name yourself as a trustee.
- You give up permanent ownership of your assets. You completely step aside when you transfer assets to an irrevocable trust.
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Although these are the basics, knowing what trust to create goes beyond this. You may even require more than a revocable or irrevocable trust to accomplish your estate goals. Trusts are governed by State and Federal laws and as these laws often change, it is advised you be kept up-to-date by a competent and well-informed estate planning attorney before choosing any estate planning instrument. For the best estate planning services, contact the estate planning attorney near you 10013.