What is a Trust?
A trust is a separate legal entity that a person sets up during their lifetime to manage their assets. Its purpose is to ensure that a person's assets will be used and distributed in a way they deem appropriate. Once a trust is set up and assets are placed in it, a third party, known as a trustee or successor trustee, manages them based on the guidelines laid out when the trust was formed.
What is a Revocable trust?
A revocable trust, also known as a living trust, is essentially a type of trust known for its flexibility of allowing you to make changes anytime you would like, so long as you are competent. For example, if you would like to add more assets or beneficiaries to your trust, you are able to do that easily and at any point. Many grantors also appoint themselves as the initial trustee of their will, which allows them to use and control their property while they're still alive. In a case like this, you would also choose a successor trustee who you trust to manage your assets when you are no longer able to. It is also important to note, once you pass away your revocable trust becomes irrevocable which means generally no further changes can be made.
Though there are many benefits to a revocable trust, there are also some key disadvantages. Since grantors have so much control over their assets in a revocable trust, the assets are considered part of your taxable estate. Thus when the owner passes away, it can be subject to state and federal estate taxes. In addition, assets in a revocable trust are also not protected from creditors or lawsuits. This means that if you are sued or owe any debt, assets can be ordered to be liquidated to pay these settlements which can take away value from your trust.
What is an Irrevocable trust?
In contrast to the flexibility of a revocable trust, an irrevocable trust is a type of trust that, once executed, generally cannot be altered. However, if you believe there is good reason or circumstance to make a change in the trust, almost always an approval from court or all beneficiaries is required. This also essentially means once your assets are in the trust, you no longer have full control or freedom to make revisions.
Though irrevocable trusts can be more complicated because of its inflexibility, it does come with some key advantages. Since grantors lose full control of their assets, once put into the trust they are no longer part of your taxable estate. This means once the owner passes away, their assets will not be subject to state or federal estate taxes. In addition, assets in the trust are also protected from creditors and legal judgment, meaning you don't have to worry about lawsuits or any creditors claims.
Key Differences
There are some key differences between revocable and irrevocable trusts that are important to consider aside from flexibility of alterations. In a revocable trust, a grantor may also name themselves as a trustee, while in an irrevocable trust they are not able to do so. Revocable trusts are also kept private within a family, while documentation can be taken when creating an irrevocable trust if it goes through probate or another legal proceeding. Grantors also have more control of their assets in a revocable trust than they would in an irrevocable trust. However, an irrevocable trust offers more protection from taxes and creditors than a revocable trust does.
What type of trust should you choose ?
When it comes to deciding what trust suits you best, it can be stressful and there are also a lot of factors you must take into account. For example, some may be more comfortable giving up full control of their assets while others may want more control. It's important to lay out all your options and see which one is most beneficial for you. If you are looking for assistance as to what trust is most favorable for you, contact Estate Planning Attorney Inna Fernshteyn at (718) 333-2394