Revocable Trust vs Irrevocable Trust in the US​

Revocable Trust vs Irrevocable Trust

A trust could be the best option for individuals to transfer assets either during their lifetime or after their passing. A trust is a distinct legal body established to hold particular assets controlled by the trustee.  Families tend to rely on trusts for The purposes of estate planning – to plan estate taxes, avoid probate, and transfer wealth.

Revocable Trust​

Revocable trusts also translate to living trusts. They are lifelong trusts that the creator may modify or revoke at any time while they are still alive. The originator (or granter) of the trust, as a rule during their lifetime, also serves as a trustee and beneficiary.

Advantages of a Revocable Trust:

  • Allows for Asset Management During Periods of Disability:
    • If the granter becomes incapacitated, the successor trustee can manage assets held by the trust.
  • Streamlines Asset Management After-death:
    • The successor trustees will have immediate access to assets held by the trust when the granter dies.
  • Avoids Probate:
    • Assets transferred during life avoid probate at death.
  • Offers Privacy:
    • The provisions mentioned in a revocable trust do not turn into a matter of public record during certification proceedings, unlike wills.

Disadvantages of Revocable Trust:

  • Lack of Tax Savings:
    • Although the transferred property is no longer part of the grantor’s probate estate, its value will be counted toward the grantor’s taxable estate.
  • Lack of Asset Protection:
    • The trust’s assets are not shielded against future granter creditors’ claims because the granter still has the authority to cancel the trust.

Irrevocable Trust​

An irrevocable trust cannot be revised, changed, or adjusted like in the case of revocable trusts.

Advantages of an Irrevocable Trust:

  • Minimizes Estate Taxes:
    • If the transferred property is considered a completed gift for federal gift tax purposes, it is not counted as part of the grantor’s taxable estate when the grantor passes away.
  • Provides Asset Protection:
    • For professions prone to lawsuits, this can prove handy, as trusts tend to provide protection from creditors of the granter.
  • Protects Assets from Misuse:
    • A grantor may change the terms of the distribution and withhold the assets to prevent beneficiaries from misusing the trust’s assets.

Disadvantages of Irrevocable Trusts:

  • Complicated Setup:
    • Can be complex and expensive to set up.
  • Offers Less Flexibility:
    • Typically, terms are not flexible and cannot be changed without permission from the grantor’s beneficiaries.

Leave a Comment

Your email address will not be published. Required fields are marked *