We’re going to take a break from bankruptcy today to talk about living trusts. These trusts help to distribute your assets after death. There are two major types of living trusts you can form: revocable and irrevocable. In this article we will go over the differences between the two in order to help you better decide which is right for you.
A revocable trust is a trust where you retain control and ownership of all the assets placed in the trust. This allows you to add or remove property from the trust at will. It can be especially useful for those with smaller estates as it helps to avoid the probate process and more easily transfer your assets into the possession of your loved ones after death.
An irrevocable trust establishes the trust as a separate legal entity that retains control over any assets added to your trust. This means that the trust, quite literally, owns anything added to it. That could mean your house, your car, or any other piece of property you may choose to add. This acts as a great way to shield your assets from creditors as you are selling those assets to the trust as surely as if you had sold it to a friend or relative for “safekeeping”.
The downside is to this is that you cannot remove items from the irrevocable trust once added, taking some control of the situation out of your hands.
Revocable or Irrevocable Trust?
The decision about whether to use a revocable or irrevocable trust will vary greatly depending on your financial situation. Irrevocable trusts are no longer the property of the Grantor, so in addition to shielding the assets from creditors or other liability, the Grantor does not have to worry about the taxes on that property. This can be especially useful for those who own large estates that fall over the federal tax exemption values.
The revocable trust is better for smaller estates, since it helps avoid the probate process and may fall under the tax exemption limit anyway. Furthermore, you retain full control over assets within a revocable trust. The downside is the opposite of the upside of the irrevocable trust – any assets placed in this trust are open to liability from creditors and others who may have a claim.
From a strict tax standpoint, it may seem like irrevocable trusts are your best option. However, revocable trusts give you a greater measure of control. You can also appoint somebody who will manage your trust in your stead should you become incapacitated, not the case with an irrevocable trust where the property is, as stated previous, in the hands of the trust itself.
The option that is best for you will depend on your financial state and the laws at the time. While we try to provide the best general overview here, those laws can change at any moment. If you wish to set up a trust to help prepare for the inevitable, contact us and we will discuss with you the best options for your future trust. Once a decision is made, we will help you with setting up either a revocable or an irrevocable trust depending on your needs.