What’s the difference between revocable and irrevocable trusts? This common question deserves some background and explanation. A Trust is typically the central planning tool we use at McManus Estate Planning, LLC. It is a far more sophisticated device than a simple Will, and can result in significant legal and tax benefits when done properly.
KAKE.com’s recent article entitled Revocable vs. Irrevocable Trusts explains that a living trust can be revocable or irrevocable. However, be mindful of the fact that there are in fact dozens of different kinds of trusts, not just two. Likewise, trusts may be revocable and then subsequently become irrevocable at a later event, like the death of the trust-maker.
Before examining the specific differences between irrevocable and revocable trusts, one must know some similarities. One of the primary roles in every Trust is the trustee. This is essentially a manager, bookkeeper and guide. You can act as your own trustee, so long as you are healthy and able, or designate another person. Attorney McManus will help you decide the best trustee to name as well as alternates. The trustee has the fiduciary responsibility to act in the best interests of the trust beneficiaries. Beneficiaries are the people or charities you name to benefit from the trust. Both revocable and irrevocable trusts have Trustees and beneficiaries. In this way they are similar.
In general, Trusts share some additional features, depending on how they are written:
- Avoiding probate. Assets held in a trust can avoid probate. This can save your heirs time and money while preserving family harmony.
- Creditor protection. Trusts may be drafted to provide protection from creditors, but please do not assume that every trust is designed to do so. Only certain irrevocable trusts have this feature. Creditors can try to attach assets held outside an irrevocable trust to satisfy a debt. However, those assets titled in the name of the irrevocable trust may avoid being accessed to pay outstanding debts. Again, this is only seen as a feature in trusts specifically designed to do so.
- Minimize estate taxes. Estate taxes can take a large portion from the wealth you may be planning to leave to others. Placing assets in a trust may help to lessen the effect of estate taxes, preserving more of your wealth for future generations. This is especially important in Massachusetts, which has a significant state estate tax administered by the Massachusetts Department of Revenue.
What’s the Difference Between Revocable and Irrevocable Trusts?
A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the person making the trust. When the grantor dies, a revocable trust automatically becomes irrevocable, so no other changes can be made to its terms.
An irrevocable trust is essentially permanent. Therefore, if you create an irrevocable trust during your lifetime, any assets you place in the trust must stay in the trust. That’s a big difference from a revocable trust: flexibility.
Whether a trust is right for your estate plan, depends on your situation. Discuss this with a qualified estate planning attorney. This has been a very simple introduction to a very complex subject.
Reference: KAKE.com (March 31, 2020) Revocable vs. Irrevocable Trusts