Two of the common tools that you will encounter when planning your estate are revocable and irrevocable trusts. Known as “intervivos” trusts, because they go into effect while you’re still alive, both trustsare meant to give you peace of mind when planning your estate. They both ensure protection and proper distribution of your assets upon your death by following your specific guidelines and preferences. Revocable and irrevocable trusts have their differences, however. Understanding what those differences are will help you decide what's right for you and your heirs.
In establishing a trust for your estate, you need to know the essential elements that make up a trust policy. A grantor creates the trust document. A trustee to the designated beneficiaries then distributes the estate in the trust document in the event that the grantor dies. With a revocable living trust, the grantor can make changes in beneficiaries any time, by means of a trust amendment. A revocable living trust becomes irrevocable only upon the grantor’s death. An irrevocable living trust, on the other hand, is a trust that the grantor can no longer modify. The grantor transfers his property or estate to a designated trustee who manages the property in behalf of its beneficiaries. Legally, the grantor is no longer the estate owner. The grantor cannot make any amendments or revisions to the documents unless the designated beneficiaries give their consent.
Estate tax considerations are the most significant distinctions between revocable and irrevocable trusts. Any property that you place in an irrevocable trust is no longer part of your estate; therefore, it is excluded from death taxes. On the other hand, you still own the property that you place in a revocable trust; therefore, it is subject to death taxes. In the event that you change your mind and remove the property from the revocable trust while you’re still alive, the property will be part of your estate. In other words, with an irrevocable trust you get a break on estate taxes, while with a revocable trust you don’t. Keep in mind, though, if your estate’s value is nowhere near federal estate tax exemption, you should not worry about saving on federal taxes.
Revocable living trusts can establish a credit-shield trust to reduce estate taxes. An irrevocable trust gives added protection and tax exemptions to assets by declaring them as incomplete gift trusts instead of estates. As such, beneficiaries need not worry about paying inheritance taxes after assuming ownership of the grantor’s estate.
Revocable trusts require a certain amount of organizing, as the grantor needs to continually register future assets and retain professional services to file whenever necessary. Established revocable trusts need property re-itling, which can put a strain on your time and pocket. Estate planning through living trust can post huge costs, which include legal and documentation fees. In addition, revocable trusts with the grantor as the trustee offer minimal protection to the estate and lesser tax exemptions. Irrevocable trusts are more beneficial compared to living trusts since it costs less to manage and offers flexible property management. The only drawback in an irrevocable trust is its very nature. Once it is established, you can no longer amend the provisions.
- TheStreet: Differences Between a Revocable and an Irrevocable Trust
- Dummies.com: Estate Taxes for Revocable and Irrevocable Trusts
- Estate Street Partners, LLC: List of Differences Between Revocable and Irrevocable Trusts
- Washington State Bar Association: Revocable Living Trusts
- University of Kentucky: Estate Planning: Trusts
- InvestorGuide.com: Irrevocable Trusts
Josienita Borlongan is a full-time lead web systems engineer and a writer. She writes for Business.com, OnTarget.com and various other websites. She is a Microsoft-certified systems engineer and a Cisco-certified network associate. She graduated with a Bachelor of Science in medical technology from Saint Louis University, Philippines.