In estate planning, a trust is a legal entity that allows a third party, or trustee, to hold and manage an individual’s (grantor’s) assets. They ensure that assets are handled in accordance with the grantor’s wishes. Depending on the assets you have, trusts can be used instead of a Will to pass property to a beneficiary after the grantor dies.

Two types of trusts are revocable and irrevocable. The difference lies in whether the terms and conditions of the trusts can be changed. If you’re considering creating a trust as part of your estate plan, here are the basic differences between these two types, and how to decide which is right for you.

Revocable trust 

With a revocable trust, the terms and conditions can be changed or terminated at any time. This trust holds assets for the grantor while they are alive and the grantor is often the first-named trustee for their Trust. After the grantor’s death, the trust assets are managed by a successor trustee named in the Trust, who will then manage and distribute those trust assets according to the conditions of the trust.  The successor Trustee may also receive additional assets after the grantor’s death where the grantor had named their Trust as a payable on death or transfer on death beneficiary.

Pros:

• Flexibility: Since revocable trusts can be changed throughout your lifetime, this allows grantors and trustees the freedom to modify how or what assets are distributed. You can also add or remove beneficiaries at any time. Trusts also are useful tools to hold assets for the benefit of children or to even provide for your family home to be maintained for their benefit to live in with a guardian appointed to care for them after your death.
• Avoid probate: The probate process, which is how assets are distributed through a Will, involves quite a lot of paperwork and fees. This can be a long and strenuous process for most families. Instead of going through the court, assets placed in a trust are automatically passed on to beneficiaries, which can save both time and money.
• Protects you if you become incapacitated: If there comes a point where you are physically or mentally unable to manage your trust, you can pre-appoint your named successor Trustee to take over some or all of your trustee duties for you.

Cons:

• No tax benefits: Unless the grantor is married, once the grantor dies, all of the assets covered by the trust are subject to federal estate taxes (depending on the value of the assets). The current federal tax laws for 2020 allow you to have assets of $11.58 million per individual before any federal estate tax would apply.
• No asset protection: Revocable trusts treat assets as your personal belongings, but when those assets pass to your beneficiaries, they are protected from creditors.
• Time-consuming: Though you can avoid probate, you need to take extra steps after you sign your Trust document to either re-title your assets into the name of your trust or name your trust as the beneficiary for such things as life insurance, banking or investment accounts.

Irrevocable trust

An irrevocable trust is created with fixed terms and conditions. Once the terms are signed and agreed to, your rights of ownership are removed from the assets. There are only a few cases in which terms can be changed, but they are extremely rare.

Pros:

• Tax benefits: All assets placed in an irrevocable trust for at least 5 years prior to your death are removed from any estate that is taxable.
• Legal protection: If there were ever a lawsuit against you, the irrevocable trust protects your assets and they will not be subject to judgment.
• Medicaid planning: If you believe that you may require Medicaid in the future, this type of trust may be needed in order to qualify for Medicaid, with the caveat that such planning needs to occur at least 5 years prior to the time when you might need Medicaid.

Cons:

• Rigid terms: Even if you’re the grantor, you cannot change the terms of the trust. You essentially lose the ability to control anything outside of the original agreed-upon terms. Trust protector provisions can be added to allow a third-party to make certain limited administrative updates to the trust if needed, but the grantor has no control over those changes personally.
• No ownership of assets: You lose control over your assets once the trust is created, which can be a disadvantage if you needed to sell the assets for any reason or wanted to change up their distribution.

Which is right for you? 

Both trusts are living trusts and are created in conjunction with a special kind of Will called a “pour-over Will,” that serves a very limited purpose of adding assets to the trust that pass through probate because the grantor did not name their trust as a payable/transfer on death beneficiary of the assets or did not re-title the assets into the name of the trust. These trusts provide the opportunity for grantors to secure their assets and ensure they are distributed according to their wishes. Trusts can be a great way to pass on wealth to children or grandchildren and provide for other family members after death.

Irrevocable trusts cannot be changed, so you need to ensure you are absolutely set on the terms created and the trustee(s) designated. Additionally, you should consider the features of each trust. The advantages of the irrevocable trusts, typically related to taxes, can be complex and costly to arrange. Though these can be truly beneficial, you need to make sure you are all in when it comes to your decision.

When considering trusts, it’s important to have an experienced attorney to walk you through every step and help you make the best decisions. The Law Office of Patricia E. Tichenor, P.L.L.C will assist you, ensuring your assets are protected not only while you’re here, but also after you’re gone. Contact us today for a free virtual consultation.