Revocable vs. Irrevocable Trusts

There seems to be some common estate planning questions in comparing revocable trusts to irrevocable trusts. The answers are really quite simple

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A trust is a legal agreement that allows a person (the trustee) to control certain assets that have been listed in the agreement. For a trust to be legitimate, it must have four parts. First is the grantor. This is the person who creates the trust. Usually it’s the person who currently owns the assets being transferred to the trust. Second, the trust includes assets or property. These assets may be real estate, money, furniture, etc. Third, is the trustee. This is the person who manages the trust and makes any distributions from it. Finally, the beneficiary or beneficiaries are the people who benefit from the trust. Beneficiaries receive payments from the trust.

Using a Trust in Lieu of Will

Many property owners set up trust as an alternative or addition to a will. By placing property in a trust, the included assets avoid the costly and time-consuming probate process that must happen when there is a will. Probate can take months and cost thousands of dollars. Probate costs often are deducted from the deceased’s estate. The beneficiary may even have to liquidate assets to pay probate costs.

When property is held in trust, the trust agreement specifies what happens to the property when the grantor dies, or even if the grantor becomes incapacitated. These actions happen automatically without having to go through the court system. Beneficiaries don’t have to bear the burden of court costs associated with probate.

Two Types of Trusts

There are two major types of trusts – revocable and irrevocable trust. A revocable trust, also known as a revocable living trust or simply living trust, is in place as long as the grantor is still living. At any time, the grantor can “revoke” the trust and continue to make changes as long as he/he is still living. Changes can be made to a trust through a trust amendment. On the other hand, an irrevocable trust is one that cannot be changed.

Benefits of a Revocable Trust

One of the primary benefits of a revocable trust, avoiding probate upon the trustmaskers death, has been explained above. Another benefit is additional protection in the onset of a mental disability. A trust can include a disability trustee who can manage the trust if the owner becomes completely incapacitated. Without this disability trustee, it would take a lengthy court process to appoint a conservator or guardian to oversee the owner’s assets.

Why Have an Irrevocable Trust?

Most trusts automatically convert to an irrevocable trust upon the grantor’s death, but a living person can also create an irrevocable trust. What makes a trust irrevocable is that changes cannot be changed. A joint revocable trust or a trust with multiple beneficiaries is split into multiple irrevocable trusts when the trust maker passes away.

If an irrevocable trust can’t be changed, why would someone choose to have one? When it comes to revocable trusts, creditors can seize the owner’s property. Not only that, the assets will still be subject to estate taxes. Placing the assets in an irrevocable trust keeps them from being taxed when the trustmaker dies. Beneficiaries don’t have to worry about coming up with the money to pay estate taxes. Assets in an irrevocable trust are also protected from creditor lawsuits. Fortunately, beneficiaries can still access the assets if necessary. In some states, even the trustmaker can be a beneficiary.

Though, by design, an irrevocable trust can’t be changed, there are certain exceptions that allow beneficiaries or the trustee to modify the trust. For example, an estate plan might include a trust protector who can look over the trust details to make changes. Also, if the assets in a trust are sold, the trust is terminated.