The Difference Between a Revocable and Irrevocable Trust: Do I need either?

A Revocable Living Trust, also known as a Living Trust or Inter Vivos Trust, is a simple trust that can be changed over time. Therefore, if you change your mind about your thoughts or provisions of the trust, you can freely modify the terms by using what is called a trust amendment. Or, if you decide you want to change the trust all together, you can simply revoke the agreement or change every detail through a trust amendment or restatement.

Because Revocable Trust are so flexible, there are also some downsides. First, all the assets that are titled in the Trust are considered your own personal assets for creditor and estate tax purposes. Thus, a Revocable Trust does not get the favorable tax treatment that other tax planning vehicles, such as an Irrevocable Trust, can give you. In short, a Revocable Trust offers no creditor protection whatsoever. In addition, all of the trust assets will be considered yours and will be subject to both state estate taxes and federal estate taxes and state inheritance taxes.

So, without any real tax benefits or protection from creditors, why should one have a Revocable Trust?

First, to plan for disability. Assets held in a Revocable Trust will be managed by the Trustee in the case of disability or mental incapacity. Therefore, in the unfortunate event of either of the two, distribution and management of your assets are be taken care of.

Second, to avoid probate. Assets held in the name of the Revocable Trust at the time of death, will pass directly to the beneficiaries named in the trust agreement and will avoid the probate process.

Third, to protect your privacy. By avoiding probate, all assets in the name of the trust will remain private and will not become public record through the court process of probate. If assets are not named in a trust, then they can be searched through public records thus losing all anonymity. If you want privacy, get a trust.

Irrevocable Trusts, on the other hand offer all of the benefits listed above, plus more. A Irrevocable Trust is simply a type of trust, unlike a Revocable Trust, that can’t be changed after the instrument is signed by the testator. Because of it’s irrevocable design, assets that are named in the trust are not viewed as personal property, for tax and creditor purposes. Therefore, when you die, assets that are named in the trust are not seen as the assets of the deceased, but rather, the assets of the trust.

Irrevocable trusts can take on many forms and be used to accomplish a variety of estate planning goals, including:

First, estate tax reduction. When a person transfers assets into an irrevocable trust, he is giving over those assets to the Trustee and beneficiaries of the trust so that he no longer owns those assets. Thus, he cannot be taxed on those assets when he later dies. In addition, if created correctly, the surviving spouse can make full use of the deceased spouse’s exemption from estate taxes through the funding of the trust.

Second, to provide asset protection. This works similarly to how an irrevocable trust reduces estate tax, in that if property is no longer owned by he decedent, creditors cannot reach those assets to satisfy debts.

Third, for charitable estate planning purposes. Another common use of an Irrevocable Trust is to accomplish charitable state planning. If a testator makes an initial transfer of assets into a charitable trust while he is still alive, he will receive a charitable income tax deduction in the year the transfer is made. Or, if the charitable transfer isn’t made until after death, then the testator will receive a charitable state deduction upon death.

As you can see, there are various benefits to both a Revocable and Irrevocable Trust. I have just touched on how either of these documents can assist you in your estate planning needs. To discuss whether you would like to benefit from these useful tax planning vehicles, please contact Keirnes Law Firm at 612-805-0144 for more information.





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