A trust is a key pillar of estate planning. At its simplest, it allows the creator or grantor to transfer their assets into a trust, which is then managed by a third party, or trustee, on behalf of the beneficiaries. There are many different types of trust, all of which help people manage their property when they are still alive, or distribute it after their death. Generally, each type of trust will fall into one of two categories:
Read on to learn more about the key differences between revocable and irrevocable trusts, how to choose the right type of trust for you, and the legal considerations to keep in mind.
According to the American Bar Association, a revocable trust is “a trust that is created and funded during your lifetime that you retain the power to amend or revoke.” Also known as a living trust or inter-vivos trust, a revocable trust allows the grantor to change the terms at any time, or even cancel the trust altogether. This gives you control of your estate while you’re still alive; in fact, with this type of trust, the grantor often acts as the trustee too. However, a revocable trust becomes irrevocable when you die.
An irrevocable trust is a trust that cannot be changed or revoked by the grantor, except in very rare circumstances. Even in these specific instances, the changes need the approval of all the beneficiaries, the trustee and the courts. When you set up an irrevocable trust, ownership of your assets passes to the trust, and they are no longer part of your taxable estate.
Let’s take a closer look at the differences between the two types of trust:
Both revocable and irrevocable trusts offer specific benefits. Both types can help you avoid the probate process, ensuring the smooth transfer of assets to your heirs. Unlike a will, a trust is not a part of public record, so you’ll be able to keep the details private. Depending on your objectives, there are a few reasons why you might choose one trust over the other.
If you’d like the flexibility to change or cancel your trust at any time, then consider a revocable trust. This allows you to retain control of your assets during your lifetime, giving you the freedom to amend the trust structure, change the beneficiaries, distribute assets, or give to charitable causes whenever you see fit. A revocable trust is also used to plan for incapacity. With a revocable trust, you can nominate a successor trustee to look after your assets and property in the event that you become incapacitated.
An irrevocable trust is the one to choose if you’re looking to protect your estate, whether from creditors, taxes or lawsuits. If you have a large estate that would exceed the estate tax exemption, you can move assets into an irrevocable trust to reduce its overall value and avoid having to pay federal estate tax. Transferring ownership of your property in this way also helps to shield your assets from creditors, and irrevocable trusts are therefore often used by people who work in fields like real estate or medicine that open them up to the threat of litigation. Finally, you might want to consider an irrevocable trust in order to qualify for government benefits such as Supplemental Security Income or Medicaid.
While revocable and irrevocable trusts form a key part of effective estate planning, there are legal requirements to consider. It’s important to understand the regulations and comply with federal and state laws when setting up and administering a trust.
When creating a revocable trust, you’ll need to fund the trust by retitling your assets. If you don’t do this, they’ll be subject to probate further down the line. And while a revocable trust offers flexibility and the ability to retain control of your assets, this does mean that you’ll need to keep an eye on it. Unlike a will, for example, a revocable trust will need updating in line with life events—such as having another child. Finally, remember that a revocable trust becomes irrevocable when you die. It’s important to appoint a successor trustee, both to ensure that your wishes are carried out and to manage your property if you become incapacitated.
Irrevocable trusts have the benefit of shielding your assets from tax and creditors; however, when the trust assumes ownership of your assets, the trust becomes a taxable entity in its own right. An irrevocable trust is liable for the tax on any income generated by the assets held in the trust. As a result, the trust will need to have its own tax identification number and file its own tax return. Given the complexity of an irrevocable trust, it’s always wise to engage a professional attorney to help.
While both revocable and irrevocable trusts play a valuable role in a comprehensive estate plan, each type of trust has its own complexities. It can be challenging to streamline trust administration efficiently when you have to balance all the different tax liabilities, asset management and regulatory compliance. That’s where a dedicated software solution can help.
Estateably is a software platform for trust and estates professionals. Our trust administration tools include automated alerts for filing deadlines, secure document storage, and real-time updates on trust assets—all with compliance built in. Estateably’s tailored solution seamlessly adapts to any changes in structure, for example, when revocable trust becomes irrevocable on death, so you can manage any type of trust with confidence.
Get in touch or schedule a demo with one of our expert team to see our trust administration tools in action.
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