Choosing between an irrevocable or a revocable trust can be difficult, but it will help to understand the differences between the two. Your needs and desires in terms of protecting your assets from either probate or taxation will determine which trust best suits your needs, so here is some information about the pros and cons of each, and the reasons why people choose one over the other.
Both revocable and irrevocable trusts are types of legal documents that are created to hold or own the assets of the individual who created the trust. With both types, the grantor (also called trustor or trustmaker) who creates the trust names a trustee who is responsible for controlling the assets. Aside from that, however, revocable and irrevocable trusts are different in many ways.
Options for change: One main difference between the two types is that a revocable trust can be changed and modified through a trust amendment. Similarly, the trust can also be revoked, as the name suggests. Irrevocable trusts, on the other hand, cannot be amended or revoked once they’re signed.
Who the trustee is: With a revocable trust, the trustee is most often the same person as the grantor, meaning the person who creates the trust is also the person responsible for the assets contained therein. Unlike a revocable trust, however, the trustee of an irrevocable trust is an entity independent of the grantor. The trustee can be a family member, spouse, or somebody else who isn’t the grantor.
Ownership of assets: When a person creates a revocable trust, the assets put into the trust remain the property of the grantor. But when you create an irrevocable trust, the ownership of the assets in the trust are transferred to the trust itself.
Pros of a Revocable Trust
The main and obvious benefit of a revocable trust is that it can be amended as your situation changes. You can modify the trustee, beneficiary, and the assets contained in the trust at any time to reflect changes in your life, such as a marriage or divorce, the birth of children or grandchildren, or the acquisition of properties and businesses. Other reasons to choose a revocable trust include to:
Pros of an Irrevocable Trust
There are many reasons why irrevocable trusts are advantageous, including that they provide protection for the estate. Because assets transferred to the trust become the property of the trust, they are not considered assets of the grantor for the purposes of death and estate taxation, Medicaid, and creditors, and they’re also protected from legal claims.
Cons of a Revocable Trust
While revocable trusts do have many benefits, the chief disadvantage is that your personal assets are not protected from taxes or creditors, and they cannot be exempted from Medicaid calculations. At the time of your death, all assets in the trust will be subject to both state and federal estate taxes, and state inheritance taxes.
Cons of an Irrevocable Trust
The major drawback of an irrevocable trust is that it cannot be changed or amended after it’s signed, so even if you experience great changes in your life, your trust cannot be modified to reflect your new situation.
Deciding between a revocable trust and an irrevocable one, therefore, comes down to the main question of what you’re looking to protect your assets from. An irrevocable trust has the disadvantage that you can’t change it, but your estate will be protected from tax and creditors.
On the other hand, a revocable trust gives you the freedom of changing the trust at any time, and while your assets won’t be protected from creditors and taxation, they will be protected from probate.
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