A lot of people call into our offices with estate planning questions about trusts. One question we often frequently receive is about the difference between various trusts. For example, specifically, the difference between Revocable and Irrevocable Trusts. A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” . Now, despite what you may have heard, not everyone needs a trust. For most, a will may be enough. However, there are many situations in life in which a trust can make your legacy easier to administer.
In trust planning, there are many distinct types of trusts you can establish, and a revocable trust is a trust that can be changed or terminated at any time during the lifetime of the grantor (i.e., the person making the trust). This means you could:
When you die, a revocable trust automatically becomes irrevocable, and no further changes can be made to its terms. An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust must stay in the trust. You cannot add or remove beneficiaries or change the terms of the trust.
The big advantage in trust planning of choosing a revocable trust is flexibility. A revocable trust allows you to make changes, while an irrevocable trust does not. Revocable trusts can also allow your heirs to avoid probate when you die. However, a revocable trust does not offer the same type of protection against creditors (or the nursing home) as an irrevocable trust. If you are sued, creditors could still try to attach trust assets to satisfy a judgment. If you must go into long-term care, those assets in a revocable trust are deemed “available” while those in an irrevocable trust are not. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die.
In addition to protecting assets from creditors, irrevocable trusts can also help in managing estate tax obligations. The assets are owned by the trust (not you), so estate taxes are avoided. Holding assets in an irrevocable trust can also be useful if you are trying to qualify for Medicaid to help pay for long-term care and want to avoid having to spend down assets.
But again, you cannot change this type of trust and you cannot act as your own trustee. Once the trust is set up and the assets are transferred, you no longer have control over them.
Want to learn more about the difference between Revocable and Irrevocable Trusts? Book a call with our firm to see if a revocable or an irrevocable trust is best for you and your family; or you might find out you do not even need a trust at all. We have offices in Bassett, Danville and Lynchburg to better serve you!
Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”