Many people set up either a revocable trust or an irrevocable trust to avoid the long, expensive, and complicated process of probate courts. Both these trusts are inter vivos, that is, they are in effect during the life of the property owner. Let’s learn why people would choose to establish one of these two types of trusts..
In a revocable trust, property is placed into a trust by a trustor (property owner). The terms of the trust can be modified at any time. A trust is a legal agreement typically established in a will, in which management of an estate is transferred to one or more individuals (called trustees).
Any provisions contained in a revocable trust can be changed, including adding or removing beneficiaries and/or trustees, which is carried out via a trust amendment. The whole trust itself can be revoked to allow for entirely new provisions by way of a trust amendment and restatement.
Property placed in a revocable trust remains property of the trustor, so death taxes are still applicable. Revocation of the trust does not change the trustor as the owner of the property. As long as the trustor is alive, provisions in the trust can still be changed.
Property that is transferred to an irrevocable trust is no longer part of the trustor’s estate, and will not count when death taxes are calculated.
Most people use an irrevocable trust in the event that they become mentally incapacitated, as the assets will be handled by a trustee and not by a guardian appointed by the courts. Another important reason is that the terms of the trust agreement will always be private and confidential.
In an irrevocable trust, no provisions can be modified once the trust had been signed. It can also be a revocable trust designed to become irrevocable after a specified time (e.g. the trustor’s death). The trustor no longer has control over the assets once it has been transferred to the irrevocable trust.
Estate taxes are no longer an issue once the property passes on to a trustee. An irrevocable trust can also shield the property from creditors if the owner is sued. Moreover, if the property was transferred to a charitable trust, the trustor is entitled to a charitable income tax deduction.
Revocable vs Irrevocable Trust
So what’s the difference between a revocable and an irrevocable trust? The main difference is that a revocable trust can be modified, while an irrevocable trust cannot be modified once it is in effect.
All assets transferred to a revocable trust are still considered property of the trustor. Thus it does not protect the assets from creditor action and all manners of taxes that will be due upon the death of the property owner. In contrast, assets held in an irrevocable trust are no longer property of the owner, which means its value will not be used in determining if he owes death taxes or not.
|Revocable Trust||Irrevocable Trust|
|Provisions can be changed||Provision cannot be changed|
|Assets still considered to be the trustor’s property||Assets cease being part of the trustor’s estate|
|Assets are still subject to tax or creditor action||Assets are protected from estate tax and creditor action|
Check out this YouTube video for more about revocable and irrevocable trusts.