When it comes to living trusts, there are two basic options available; a revocable trust and an irrevocable trust. When it comes time to determine which type of trust is best, it is important to understand the fundamental differences between the two trusts and when one may be better than the other.
The revocable trust is the type of living trust that remains under the ownership of the grantor, or the person who takes out the trust. Revocable trusts can be changed and even cancelled at any time, which makes this type of trust seem like a great option. However, there are drawbacks to revocable trusts that are discussed below.
The irrevocable trust is where the grantor’s assets are moved out of his or her estate. This means that the assets in the irrevocable trust are no longer considered the property of the grantor. In some scenarios, the irrevocable trust may more sense than a revocable trust.
When an Irrevocable Trust is Better
Asset Protection – When a person has assets in a revocable trust, these assets are considered the trustmaker’s property. Because of this, these assets are vulnerable to creditors; assets in revocable trusts can also be taken should a lawsuit be brought against the grantor. However, when assets are in an irrevocable trust, these assets are no longer considered the property of the grantor, but instead are managed by an independent trustee. All of the decisions regarding the assets in the irrevocable trust will be in the hands of the independent trustee, and may or may not be extended to the grantor.
Estate taxes – Because assets in a revocable trust remain in the grantor’s estate, these assets may qualify for the federal estate tax depending on the value of the assets. However, assets in an irrevocable trust are no longer part of the grantor’s estate, disqualifying them from estate taxes.
Capital Gains Taxes – If handled correctly, assets that are transferred to an irrevocable trust will not be taxed as capital gains. In revocable trusts, these same assets would be taxed. However, be aware that gift taxes may be required when transferring money to an irrevocable trust.
Charity – If an individual decides to put assets into an irrevocable charitable trust, these assets can be written off as charitable deductions at tax time.
When a Revocable Trust is Better
Irrevocable trusts may be ideal when there is a large amount of assets that could be taxed. On the other hand, revocable trusts are typically best for individuals who do not have serious tax issues. Even more, revocable trusts are usually recommended for individuals who may at some point lose the mental capacity to handle their own assets. For instance, if an individual has a family history of dementia, it may be wise to transfer assets into a revocable trust. Once this individual is no longer able to manage the assets in the trust, the designated trustee will step up to handle the assets. If the original grantor chooses to do so, specific wishes and guidelines can be stated in the revocable trust for the successor trustee to follow. However, in most other cases, irrevocable trusts make the most financial sense.
Talk to an Estate Attorney
If you have questions regarding trusts or would like to discuss setting one up, contact Clear Counsel Law Group to schedule a consultation. The attorneys at Clear Counsel Law are experienced in estate planning and are there for you to help secure your family’s financial future.