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:
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.
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.