What is The Difference Between a Revocable and an Irrevocable Trust?

A trust refers to an arrangement where an individual, known as a trustee, controls assets for the benefit of one or more beneficiaries. The person who puts the assets in the trust is called the grantor. A trust offers the advantage that it usually avoids probate, or the proceedings to clear the debts of the estate and allocate the assets to heirs.

Estate planning typically involves creating a revocable trust or irrevocable trust. Both types of trusts commence with an inter vivos trust, which is a trust that the grantor establishes while they are still alive. Subsequently, the grantor can decide whether a trust is revocable, which means that it allows them to make changes, or irrevocable, which means that the trust is permanent.

A Revocable Trust

A revocable trust refers to a trust that you can update at any point in your lifetime (also known as a revocable living trust). While the grantor is alive, they have complete control over their assets, even if they place them into a living trust.

This type of trust is similar to a regular trust, where you can place any assets that you want, for instance, money, heirlooms, and land. The difference is that when you die, a revocable trust will automatically convert into an irrevocable trust.

Advantages of a Revocable Trust

It is understandable to wonder why you should establish a revocable trust in the first place. Some benefits of setting up a revocable trust are:

Avoids Probate

A living trust does not go through probate court, which is the court that oversees how the assets of a person who has passed away are to be distributed. That takes a huge burden off your family as no one wants to disrupt their normal life only to be present in a courtroom, possibly multiple times.

A revocable trust prevents your loved ones from being inconvenienced and enables them to get your assets quicker. It’s a win for everybody. However, it is notable that a trust or will has to be determined as valid, meaning that a judge will need to sign it off.

Honors your wishes

By establishing a revocable trust, you can hold your assets until you are not physically or mentally capable of doing so. For people with a family history of mental disorders or Alzheimer’s, this offers a poignant deal of peace of mind. You have a robust back-up plan to deal with such eventualities. 

Flexibility

The flexibility that a revocable trust offers is the most significant distinction between a living trust and an irrevocable trust. It gives you the ability to modify the trust as you see fit.

In a revocable trust, you can add or remove heirs, give more or less to an individual, or change other details.

The significant limitation of a revocable trust is that it does not offer you protection from creditors or lawsuits. A liability case can be brought against you as you still hold all assets in your trust and can access them.

An Irrevocable Trust

An irrevocable trust is similar to a revocable trust. The difference is that you cannot change or modify an irrevocable trust. When you set up this type of trust, it is permanent. It does not offer the flexibility of modification or any changes.

This means that you cannot control who gets grandma’s antique necklace or choose to sell it for cash. It will be a part of the trust and not under your control.

Advantages of an Irrevocable Trust

As irrevocable trusts are irreversible, you must ensure that the gains are greater than the limitations for you. Some benefits of setting up an irrevocable trust are as follows:

Offers protection from lawsuits

If you put all your assets in an irrevocable trust, then the trust has complete ownership of these assets. Anyone suing you for, say slipping on your pool deck, will not have any claim on the assets that you placed in the trust.

Reduction in estate tax

In an irrevocable trust, you give up ownership of any assets listed in the trust. Therefore, that property cannot be taxed when you pass away. It is technically the property of the trust.

Access to grants from government programs

There are stringent rules for older adults and individuals with disabilities to be eligible for some government programs. By setting up an irrevocable trust, you can reduce your taxable income, allowing you (or a relative) to enjoy the benefits of the program.

The drawback of an irrevocable trust is that since you do not technically own the assets you place in it, you will have to follow a legal process to be able to make any changes. For example, unless the individual in charge of your trust approves it, you cannot remodel the home you have placed in your trust.

Will a revocable or irrevocable trust be appropriate for your needs? A review of your estate and personal needs can help determine the most beneficial trust for you. A qualified estate planning lawyer can help you ensure that you have the right documents for your planning needs.

Consult with Us for the Right Legal Advice

The experienced attorneys at Davis, Bingham, Hudson, Buckner, P.C. can analyze your estate and recommend the best course of action for your needs. Call (334) 821-1908 or message us online reach for a detailed estate planning consultation. 

Who Needs a Will?

A will is the most basic of all estate planning documents. A Last Will and Testament outlines, in writing, how you want your final affairs to be carried out. This type of document covers important areas such as who you want your assets and property to go to, when and under what conditions your property should be distributed to your heirs, and if you have minor children at the time of your passing, who you want to raise your children in the event of a worst-case scenario.

Do I Really Need a Will?

According to AARP, approximately 60% of American adults do not have a will, and there is a lot of debate out there about who really needs one. Many people have the mistaken notion that wills are only for the wealthy, and that those with more limited means can get by without one. But there are other reasons besides money that a person should have a will.

It could be argued that every adult should have a Last Will and Testament. Otherwise, important decisions about their final affairs will be made by the court, and not always in accordance with their wishes. That being said, there are certain categories of individuals who have even more compelling reasons to make a will:

Individuals Who are Married

If you are married, you might assume that your spouse gets everything even if you die without a will. This may or may not be true, depending on your state of residence and other specific circumstances.

In Alabama, for example, if you die without a will, your estate will be subject to the state’s complex intestate succession laws. Under these laws, if you have a spouse but no children and your parents are no longer alive, this is the only circumstance in which your spouse receives your entire estate. 

If you have children who also belong to your spouse, your spouse inherits the first $50,000 on your estate, then splits the rest with the children. If the children do not belong to your spouse, then it is a straight 50/50 split. If you have a spouse and parents but no children, your spouse gets the first $100,000 of your estate, and the rest is split 50/50 with your parents.

As you can see, there are a number of possible ways your property could be divided if you die without a Last Will and Testament, even if you are married. If you want your spouse to get everything, or you want to leave your assets to someone else, you need to make a will to ensure that this happens.

Individuals who Have Children

A lot of people who are married and even many who are not married have kids. As we talked about in the last point, having children will greatly impact the distribution of your assets under Alabama’s intestate laws. If you want to make sure your kids get your property only after your spouse and they do not split it with them, you had better put that in writing. Aside from that, if you have minor children, you should be the one making the decision about who raises them if you are no longer around. With a will, you can designate a guardian who will be responsible for raising your children. Without a will, this decision will be made by the court, and unfortunately, it will be made without your input.

Individuals with Assets

Even if you are not married and you do not have any kids, if you have a positive net worth, you should have a Last Will and Testament. This means a house with equity, money in savings, a retirement account, stock investments, anything. These assets need to be distributed when you die, and without a will, they will again be distributed in accordance with Alabama’s intestate laws. Under this scenario, if you have parents, they would get everything. If your parents are no longer alive, your siblings would get everything. If you have no living parents or siblings and there is no will, then things really get complicated. If you have any kind of net assets at all, it is best to take time to create a will to make it easier on your family and help ensure that your assets end up in the right hands.

Need Help Creating a Will? Contact Our Attorneys for Skilled Guidance

Virtually everyone should have a will, and your will should be drafted by an experienced attorney, rather than rolling the dice with one of those “fill-in-the-blank” forms online. At Davis, Bingham, Hudson & Buckner, P.C., we provide personalized guidance with the preparation of your Last Will and Testament and other estate planning needs in Alabama. We work closely with our clients, taking the time to listen and understand their unique needs and concerns, so we can ensure that your will is legally enforceable and drafted precisely in a way that fully addresses all important issues. 

Call us today at 334-821-1908 to schedule an initial consultation. You may also message us online or stop by our Auburn office in person at your convenience.