The Difference Between a Revocable Trust vs an Irrevocable Trust
If you or your family have been involved in the estate planning process, perhaps you’ve heard of the terms revocable trust and irrevocable trust. They may seem identical or close to having similar meanings, but there are distinct differences between a revocable and an irrevocable trust.
If you, your parents, or someone else close to you is interested in creating a trust, it will become very helpful to know the differences between these two types of trusts. We will examine the significant differences of these trusts and how that could impact property ownership, modifications that may be necessary, and have tax implications.
By evaluating the differences between a revocable versus an irrevocable trust, you will better understand how using a trust as part of your estate planning could benefit you and your loved ones, now and in the future.
What is a Trust?
A trust is a separate entity that someone establishes to manage their assets. Trusts are set up during a person’s lifetime to ensure that assets are used in a way in which the person setting up the trust finds it appropriate.
After assets are placed inside a trust, a third party, referred to as a trustee, manages them. The trustee decides how these assets will be invested and to whom they are distributed to when the owner of the trust passes away. The trustee has to manage the trust in accordance with the guidelines outlined when the trust was established.
It is common practice among wealthier people to use a trust instead of a will for estate planning and for specifying what happens to the person’s wealth at the time of his or her death. Trusts also provide a way of reducing tax burdens and avoiding having to pursue probate.
Differences Between Revocable and Irrevocable Trusts
Modifying the Trust
When it comes to a revocable trust, also known as a living trust, an individual typically includes language in the trust documents that gives them the ability to modify, change, alter, or even fully revoke the trust in the future. In essence, for a revocable trust, the owner of the trust can change their mind at any point regarding whether they want to retain the trust or whether they prefer to have the trust no longer be in effect.
Conversely, an irrevocable trust becomes set in stone after it is signed, witnessed, and notarized, and has been funded by having assets put into it. As a matter of fact, the language in an irrevocable trust will normally stipulate that the trust cannot be changed in any way, whatsoever, subsequent to becoming effective.
This is the case even if someone changes their mind later on.
Another primary difference between a revocable versus an irrevocable trust involves who owns the property of the trust. With respect to an irrevocable trust, trust property like bank accounts, land, vehicles, or any other type of asset or property, are actually transferred into the trust and the trust then becomes the owner of that property.
The person who before owned those assets, does not have ownership interest anymore and no longer has control over that property outside of the trust. This is because with an irrevocable trust, after it has been created and funded, the trustee cannot change any aspect of the irrevocable trust, nor can the people who created this trust.
This is not the case with a revocable trust. Although the trust becomes the owner of these types of assets and property after they have been transferred into the trust, because this trust is revocable, ownership is able to be changed at any time. Because of this, the law considers the person who created the revocable trust to have complete ownership or, at the minimum, control over the assets, including having the power to revoke or rescind the trust.
Protection of Assets
If you place a high priority on protecting your assets, then you would likely prefer an irrevocable trust as opposed to a revocable trust. Keep in mind that if a trust is revocable, the person who created the trust maintains complete control over all assets in the trust. This control includes the ability to transfer property from the trust back to the person at any time.
As a result, assets that are put into a revocable trust are typically not protected from creditors of the individual who created the trust. This means that if someone created a revocable trust and then transferred property into it, and then experienced a major liability issue, such as a judgment by a creditor, that creditor would likely have the power to attach and execute against property in the trust to resolve the judgment.
In contrast, for an irrevocable trust that is established and has property put into it, the creditors of the person who created this trust normally are not able to attach or execute against the trust property. This makes this property absolutely protected in an irrevocable trust.
Federal Estate Taxes
Federal estate taxes represents yet another significant difference between a revocable trust versus an irrevocable trust. As it stands currently, a married couple can take advantage of a $22 million exemption in assets within their estate before any type of federal estate tax is owed. In short, a couple won’t be required to pay any type of federal estate tax unless their estate has a value in excess of $22 million.
When it comes to couples whose estates are worth more than this amount, a trust could very well be a useful estate planning tool that might help them avoid paying federal estate taxes. It all comes down to whether you have a revocable or an irrevocable trust.
As a revocable trust is able to be modified, or even revoked, it cannot be used as a mechanism to avoid paying the federal estate tax on an estate that is worth more than
$22 million. However, an irrevocable trust can be used for this purpose.
As an example of how this can be played out, say there is a couple that owns an estate worth $25 million. If this couple decided to establish an irrevocable trust, and then proceeded to transfer more than $4 million worth of money, property, and/or assets into the trust so that the trust owns them, this couple might be able to avoid paying any federal estate taxes because the value of the estate that they still own individually is now under the $22 million threshold.
Look to Roberts Jones Law for Assistance with Your Litigation Matters
At Roberts Jones Law, we are here to see you through any litigation issues. We pride ourselves on being very hands-own with our clients throughout the life of their case.
If you are thinking about creating a revocable or irrevocable trust, we encourage you to schedule a free consultation meeting with us. At Roberts Jones Law, we have the expertise and skills to handle all aspects of your trust.
We are here to help if you need us.
This article is for informational purposes only and does not contain legal advice.