Choosing Between a Revocable Trust and an Irrevocable Trust

Choosing Between a Revocable Trust and an Irrevocable Trust

What is a Trust?

Registering a TrustTrusts are employed by individuals and families to distribute their assets in a fast and cost-efficient way. Shared benefits of all trusts include the conservation of the time and costs associated with probate. In addition, the distribution of assets is carried out swiftly after death, and the privacy that a living trust provides may be a persuasive element not offered by a will.

However, when you want to make an informed decision while determining how to handle your estate and distribute your assets, a critical distinction between two types of living trusts, the revocable trust and irrevocable trust, must be drawn.

The Irrevocable Trust

The irrevocable trust is simply a trust that one cannot alter having signed off on it. This trust provides a benefit not seen in a revocable trust. All property signed over to the irrevocable trust is no longer the property of the original owner. Instead, the assets are given over to the trustee and beneficiaries. This crucial aspect of an irrevocable trust is that it gives all property listed under it tax-exempt status after the proprietor’s death. Additionally, it is a beneficial tool for asset protection efforts, making it even more appealing. Because the assets in the irrevocable trust are no longer owned by you, the trust’s contents are fully accessible by your surviving family and other beneficiaries while remaining out of the reach of creditors or others who may seek to get a hand on said assets against your beneficiaries’ best interests.

Limitations of the Irrevocable Trust

The natural question received from many clients upon learning this information is: “Why bother with a revocable trust at all when only the irrevocable trust exempts property from estate taxes?”

Although it is true that assets placed in a revocable trust are subject to death taxes, this is of no concern to a proprietor whose estate value is well below the federal and state ceiling for tax exemptions. Irrevocable trusts are thus often used by families who can afford to part with large chunks of their estates for the long-term goal of passing assets on to beneficiaries tax-free.

The Revocable Trust

A revocable trust, as opposed to an irrevocable trust, gives full control of contained assets to the living proprietor. A major benefit is that probate could potentially be avoided entirely if all assets are placed into the trust. This complete avoidance of probate is more complicated with an irrevocable trust, as losing control of all assets simultaneously is impossible for a surviving proprietor.

Furthermore, revocable trusts create a relief valve in case circumstances change and the assets originally left out of the trust are no longer enough to sustain the proprietor. Such modifications would not be possible with an irrevocable trust.

Appointing a Trusted Executor

Appointing the right trustee depending on the kind of trust you are going with is of vital importance in ensuring that your property is distributed as you intended. An irrevocable trust calls for the appointment of an independent trustee by the grantor, to carry out the provisions of the trust as they are written without an ulterior motive. A family member as a trustee for such a trust is not advisable, as personal interests may get in the way of blindly carrying out the grantor’s wishes. The trustee for a revocable trust is often the grantor himself, allowing the individual to maintain ultimate control over all assets in the trust.

Setting Up a Trust

The peace of mind that comes with knowing that one’s family is provided for in a fast and cost-effective way is the basic desire of any proprietor. To turn this wish into a reality, however, one must consult a legal attorney knowledgeable in estate planning. Running a cost-benefit analysis when it comes to choosing between the two types of trusts can make all the difference for both the proprietor and the benefactors.