Developing a comprehensive estate plan requires a lot of consideration concerning how you want to handle your assets in the event of your death. Most people know to write out a will, but many don’t think about how trusts can benefit them and their loved ones both during one’s lifetime and after one’s passing.
When considering trust options, it’s important to understand the key differences between revocable and irrevocable trusts. Here’s a breakdown of the two types to help you make an informed decision as you’re considering whether constructing at least one type of trust may benefit your estate, minimize your tax liability, etc.
Control and Flexibility
A revocable trust allows you to maintain control over the trust’s assets and make changes to the trust’s terms at any time. This flexibility enables you to modify beneficiaries, trustees, or even dissolve the trust altogether.
Once established, an irrevocable trust cannot be easily altered or terminated. By setting up an irrevocable trust, you essentially transfer control over the assets to the trustee and relinquish your ability to make changes without the consent of the trust’s beneficiaries.
Since you retain control over the assets in a revocable trust, they are not fully protected from creditors or legal judgments against you. With an irrevocable trust, assets are no longer considered your property or part of your estate, providing a higher level of protection against creditors and legal claims.
Estate and Tax Implications
Assets within a revocable trust remain part of your taxable estate, and as such, may be subject to certain kinds of taxation upon your death. Additionally, the trust’s income is taxable to you during your lifetime. Transferring assets to an irrevocable trust generally removes them entirely from your taxable estate. The trust itself is responsible for paying income taxes on any income it generates.
A revocable trust provides a certain level of privacy, as it typically avoids the public probate process upon your death. Similarly, an irrevocable trust offers privacy by bypassing the public probate process.
Ultimately, the choice between a revocable and irrevocable trust depends on your specific needs and objectives. The important thing to remember is that you do what’s best to provide for your loved ones given your family’s unique needs and circumstances. Speaking with an attorney about your options can help to provide clarity regarding the myriad of different revocable and irrevocable trusts that may be of use to you.