Revocable Trust vs Irrevocable Trust – Which One Is Best For You?


Revocable Trust vs Irrevocable Trust – Which One Is Best For You?

In a previous blog post, The Importance Of A Living Trust, we covered why it is important for everyone to have a trust in place for the easy transfer of your assets to your beneficiaries. Trusts are one the most important estate planning tools to have. In this blog, we will discuss the two most popular types of trusts to choose from. There are two different types of living trusts a person can create for their estate: a revocable and irrevocable trust. Most people choose to create a revocable living trust but one is not better than the other; the best choice is the fits your needs and goals for you and your family.

What Is A Revocable Trust?

A revocable trust is a living and breathing document that be canceled or altered by the grantor at any time. While the grantor is alive, all the income earned on the assets in the revocable trust belong to the grantor and only transfer to the beneficiaries after the grantor’s passing. This particular type of trust does not offer creditor protection if you are sued. Unlike an irrevocable trust, the assets in the revocable trust are owned by the grantor and are therefore taxed and included in the grantor’s estate for Medicaid and tax planning purposes. The law states that if the grantor can undo or change the trust at any time, the grantor still owns the assets.

Even though this particular trust does not offer creditor protection, a revocable trust does allow you to plan for mental incapacitation. If you become mentally incapacitated while named as the grantor of the revocable trust, the assets in the trust can easily be managed by the named successor trustee. Also, a revocable trust avoids the probate process at the time of your death. A trust allows the assets in the trust to be directly passed to the beneficiaries named in the trust agreement. A revocable trust also protects the privacy of your property and beneficiaries because it remains a private document, not a public record for everyone to access like a last will and testament.

A revocable trust works well for people who do not have serious tax issues, want to maintain control of their assets, fear of becoming mentally incapacitated, and want to avoid probate.

What Is An Irrevocable Trust?

An irrevocable trust is a trust that the grantor cannot revoke in whole or part once the trust has been fully executed. The irrevocable trust can only be modified or terminated with the permission of the beneficiary.  Once the trust has been executed, the grantor loses his or her rights to access or ownership of the assets in the irrevocable trust. For this reason, an irrevocable trust is not considered to be part of your estate for legal and tax purposes.  

Why would a person want to lose their access and rights to the assets in the irrevocable trust? The main incentive and reason for this, is it saves the grantor money on the taxable estate and tax considerations. An irrevocable trust also removes personal liability from the grantor, which means the assets are protected against creditors. An irrevocable trust also protects the assets in the trust from nursing homes and other long-term care facilities. Nursing homes are able to access the assets and money in a revocable trust that may be meant for the beneficiaries because the grantor still personally owns the assets.

An irrevocable trust is also wonderful for charitable estate planning. If the grantor makes a transfer of assets into a charitable trust while the grantor is still alive, the grantor can claim a charitable income tax deduction in the year the transfer was made. If the grantor transfers the assets into a charitable trust after the grantor’s death, the estate will receive the tax deduction, which will help save lots of money on estate taxes.

The best choice between a revocable and irrevocable trust depends on what your specific needs are for your estate planning.  “The most important thing to think about when you’re setting up a trust is the purpose of it,” explains Shannah Game, CERTIFIED FINANCIAL PLANNER™ professional and host of the Millennial Money Podcast. “Typically, revocable trusts, or living trusts, are created to take ownership of your assets to keep them protected by the trust during your lifetime and can be changed as often as you like. Irrevocable trusts work to protect your assets from estate taxes and can work as a mechanism to leave money to your beneficiaries, but just as the name implies, are irrevocable and can’t be changed.”