Revocable vs. Irrevocable Trust

6 Nov

After learning the basics of a trust, a person typically needs to determine a variety of factors about the trust they are establishing. The one that seems to have the biggest long-term effect is whether the trust is revocable. While many of us know the definition of the word, that is not quite enough to grasp the nuances between those types of trusts.

A revocable trust, sometimes called a living trust, is almost always created for the entire purpose of allowing someone to help pass his assets outside of probate, yet allow that person to retain control of the assets during his lifetime. It is more flexible in that it can typically be dissolved at the will of the person given the authority to dissolve it. A revocable trust usually is only “revocable” during the life of the creator/grantor or whomever it names as the person holding the power to revoke the trust.

When creating such a trust, there are no legal restrictions on who is allowed to be a trustee or a beneficiary. The terms of the trust vary as commonly as trusts themselves exist. Many people try to retain complete ownership and control over the trust during their lifetime, yet there are certain risks associated with doing so, and even some lose a homestead exemption.

To an even greater degree than other trusts, consult a professional before moving your homestead to a trust ownership, because of those potential difficulties. So, when putting things in a trust, make sure the things that are desired are, in fact, the things that are accomplished. Even if one’s property is put in a revocable trust in such a way that everything post-life is accomplished, the revocable estate property is still subject to estate taxes. So, during one’s lifetime, a trust is still going to be taxed at least as much as any other entity of ownership would be.

On the other hand, an irrevocable trust typically transfers assets out of someone’s estate, but it cannot be altered by the grantor after it has been executed. While you may be able to avoid estate taxes and probate for the estate, once you establish the trust, you lose control over the assets and you cannot change any terms or decide to dissolve the trust. When putting your assets in an irrevocable trust, you are at the mercy of someone else to make sure what you want to happen, does in fact happen.

While an irrevocable trust might be preferred over a revocable trust if your primary purpose is to reduce estate taxes, a revocable trust is often preferable if you want to maintain more control over your assets. If you want to maximize the control you have, a trust might not be the most effective management tool. It’s great to take care of your estate after you go, but it is probably even more important to take care of an estate while alive! Don’t be so mindful of dying that you have to live your life in a worse way. I’ve seen people have money in a trust that they cannot touch and, therefore, be required to live a poor life.

Therefore, while putting a property in trust does in some ways remove the trust assets from your estate, it is important to know in which ways. Being relieved of tax liability on the income generated by the trust assets is nice, yet getting that money back so that you can use it yourself often does away with this benefit because the distribution does usually have income tax consequences. It may also be protected from legal action against you, which is a two pronged benefit. First, people are less likely to challenge you and second, people get less if they succeed in proving you guilty.

All other factors aside, knowing your rights to rescind or adjust the trust after creation is important when forming a trust. There is nothing more frustrating than feeling like assets, which justly seem like your own, are outside of your control to a degree where you dislike what is being done with those assets.

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