Revocable vs. Irrevocable Trusts: Can One Better Serve Your Assets?

Trusts are a great estate planning tool, but there are substantial differences to understand when deciding which type of trust is best for your situation. 

There are two main categories of trusts: revocable trusts and irrevocable trusts. Revocable trusts, otherwise known as living trusts, can be changed or modified when you need to. Irrevocable trusts can’t be changed without the consent of all beneficiaries.

So, which one is best for your estate? Creating a comprehensive estate plan requires a concerted effort from your financial team—financial advisor, estate planning attorney, and tax professional. Consult your team before deciding on the trust that will work best for you. 

The Basics of a Revocable Trust

Revocable Trusts allow the grantor, the individual who establishes the trust, to change the trust terms at any time. Changes can include stipulations for receiving the money, altering or adding beneficiaries, removing assets, or other amendments. The grantor can also use funds for income or to cover expenses in retirement.

Pros of Revocable Trusts

  • Allows you to plan ahead: Should you become incapacitated, you’ll already have a plan in place for your beneficiaries.
  • Suitable for estates that prioritize flexibility: Since you can change a revocable trust at any time, they’re a good fit for those who don’t want their plans to be set in stone.
  • Avoids probate: Revocable trusts allow individuals to bypass probate.

Cons of Revocable Trusts

  • Lack of tax benefits: Because the grantor still owns assets in a revocable trust, there are no tax benefits to establishing it.
  • Lack of creditor protection: If the grantor owes money to creditors, those creditors can come after the funds in a revocable trust.

The Basics of An Irrevocable Trust

Unlike a revocable trust, an irrevocable trust is much harder to modify once it’s been created. To make changes to an irrevocable trust, you need all beneficiaries to agree. The grantor technically doesn’t own the assets in an irrevocable trust, and a third-party trustee must be appointed to manage it. There are several types of irrevocable trusts, including life insurance trusts, charitable remainder trusts, and more.

Pros of Irrevocable Trusts

  • Tax benefits: Because the funds in an irrevocable trust no longer legally belong to the grantor and instead belong to the trust, they’re a popular way to reduce or eliminate the estate tax.
  • Creditor protection: Funds in an irrevocable trust are protected from creditors, even if the grantor owes money.
  • Avoids probate: Like revocable trusts, irrevocable trusts are another way to avoid probate.

Cons of Irrevocable Trusts

  • Less flexibility: Irrevocable trusts are extremely hard to change, so they’re not a good fit if you want to remain flexible with your estate plans or anticipate needing access to these assets in the future.
  • More complicated: Irrevocable trusts are more complex to set up, administer, and manage, and as such, typically require advice and guidance from an expert.

4 Factors To Consider When Deciding Between Trust Types

If you’re deciding between a revocable or an irrevocable trust, there are a few things you should consider, including the assets in the trust and how much flexibility you need.

The Assets Themselves

Some assets you might include in a trust include cash, investments, real estate, and life insurance, just to name a few. You should keep in mind that, as a grantor, you’ll still retain ownership and control of assets in a revocable trust, but you’ll relinquish ownership and control of assets in an irrevocable trust. In most cases, you shouldn’t place any assets in an irrevocable trust that you may need access to in the future, like your home or cash emergency fund.

Desired Flexibility

Revocable trusts are much more flexible than irrevocable trusts. You can change the terms of a revocable trust at any time and can also access assets within the trust if needed. On the other hand, it’s complicated to change an irrevocable trust. For example, if you have a falling out with a friend or family member who is a beneficiary, you may not be able to remove them from the trust even if you want to.

Creditor Protection

One of the benefits of irrevocable trusts is protection from creditors. Even if you owe money to creditors, they can’t access the funds in an irrevocable trust. This is because the assets in an irrevocable trust no longer technically belong to you.

Tax Efficiency

Trusts can also be a great way to streamline tax efficiency when it comes to estate planning. If you have a large estate, it may be subject to a hefty estate tax burden. Putting assets in an irrevocable trust is a way to reduce your estate tax burden and transfer a greater portion of your estate to beneficiaries. However, you should remember that funds in an irrevocable trust may still be subject to income tax.

Where Does A Trust Fit Into Your Comprehensive Estate Plan?

If you have a significant amount of assets that you plan to pass on to family, friends, and loved ones after your death, a trust is one of the most common estate planning strategies

Whether or not you need a trust, as well as what type of trust you need, depends on your particular situation, including the size of your estate, your specific assets, and whether or not you may need to access the funds in a trust in the future.

Whether you’re interested in setting up a trust or just want to learn more about your options, we can help. We specialize in retirement wealth management and comprehensive retirement plans for individuals in or nearing retirement. Get in touch with us today to learn more!

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