Difference Between a Revocable Trust and an Irrevocable Trust
There are two types of trusts – As clearly expressed in the title of this article. One is called a Revocable Trust, and the other – an Irrevocable trust. So far so good. To easily tell them apart, there is one major difference between the two.
With a Revocable Trust, the owner of the trust remains in full control over the assets in it. Change its terms, remove beneficiaries, designate new ones, and modify conditions as to how the assets within the trust are managed at any time. An Irrevocable trust on the other hand is pretty much set in stone from the minute the agreement is signed. So when you think Irrevocable – think unchangeable.
Now let’s dive a little deeper into how these trusts are set up and what benefits and disadvantages you can expect with these two trusts.
How To Set Up a Trust?
Whether you are setting up a revocable trust or an irrevocable trust – the process is pretty much the same.
Step 1: Create a Trust Agreement
A Trust Agreement is basically a legal document that outlines how the trust assets will be managed and distributed, as well as lists and designates all interesting parts:
- The Grantor (that’s you).
- The Trustee (someone you trust to manage the trust).
- The Beneficiaries (who you want the assets to go to upon your death).
Step 2: Fund The Trust
Because what’s a trust if there’s nothing in it. The process of this step depends on the type of property you are transferring. When it comes to real estate, you execute a deed that transfers the title to the trust, and the same goes for any personal property that has a title; like your car, boat, or plane.
Any other personal property that has no official title to transfer, you simply list in the trust, like all of your TV’s or your Barbie collection.
Your next question must be… “Yeah, but how do I set up a trust?”
Short answer – you don’t. Sure, it is possible to get educated on all the legal terms and try to do it yourself, but who has the time and patience for that? The best route is to contact your local attorney that specializes in Estate Planning and Probate. I know I just confused you even more, but let me explain.
Depending on how complicated your financial situation is, many different routes could be taken. Some situations might require a revocable trust for some assets, and an irrevocable trust for other assets. You might need to get a comprehensive estate plan (which may include a will, power of attorney, an advanced healthcare directive, etc.) A trust can also avoid probate, as the assets in the trust already have a beneficiary.
Once you sit down with a knowledgeable attorney, they will be able to guide you through this complicated process with ease. You will have the confidence that your assets are safe, and a clear image of what will happen upon your death.
Revocable Trust Benefits & Disadvantages
As stated above, a revocable trust can be edited at any time – Which is its biggest benefit. However, that same benefit could also turn into a disadvantage. All assets transferred into the trust are still considered your own personal property because you continue to have complete control over them.
So while the assets are not shielded from the owner, they are also not shielded from creditors. They may go after the assets within a trust because of a lawsuit for example, in which case the assets could be liquidated in order to satisfy a court judgment. Another disadvantage to a revocable trust is that the assets are subject to both state and federal estate taxes upon the owners’ death.
Revocable Trust and Probate
Assets within a revocable trust are not subject to probate. These assets will pass directly to the beneficiaries named in your trust agreement without probate court involvement. And because the trust isn’t subject to probate, the privacy of your property and beneficiaries is protected. When you die, your trust agreement remains a private document and does not go on public record like any probated assets.
What is a Revocable Living Trust?
A revocable living trust is just another name for a revocable trust because it is created while you are still living. They are one and the same.
Irrevocable Trust Benefits & Disadvantages
The biggest draw to an irrevocable trust structure is taxes. Irrevocable trusts essentially remove the assets from the benefactor’s taxable estate. So these assets are not subject to estate tax upon the grantors’ death and relieve the grantor of tax responsibility for any income generated by the assets.
Another benefit of an irrevocable trust is asset protection. Just like a revocable trust is not protected by creditors, an irrevocable trusts’ assets are safe and sound, as they are no longer owned by the grantor – they are owned by the trust and its beneficiaries.
Irrevocable Trust and Medicaid
So you’ve permanently given away your assets to whoever the beneficiary is of the irrevocable trust you created. Those assets are no longer a part of your estate but you may still run into some trouble when it comes to the Medicaid 5 year look-back period. The value of the property that’s given away within this time period still counts against the applicant for qualifying purposes.
What To Do next?
Now that you know a little more about the differences between a revocable trust and irrevocable trust, you can start thinking about which is better for you and your personal financial situation. Your next step should be contacting an attorney to set up a trust for you so that they can advise you about your options and your state regulations.
Not to toot our own horn here but Joan Reed Wilson and Kristen Prout are both fantastic Estate Planning and probate attorneys. Even though we are located in Connecticut, we are happy to take on clients in any state. Appointments are available via Zoom and phone. Contact us to talk about your options today!
Marketing Director & Probate Paralegal at RWC, LLC, Attorneys & Counselors at Law
Ukraine born and Israel / Miami, FL raised. University of Miami graduate in the Marketing field.
Mommy to a girl, boy, and a Siberian Husky. Blogger, health & fitness enthusiast, and lover of balance like any true Libra.