What's the Difference Between an Irrevocable and a Revocable Trust?
An irrevocable trust is a trust that can't be changed or taken back once the trust agreement has been signed. There are also revocable trusts that are designed to become irrevocable once the person making the trust has passed away.
Irrevocable trusts are used to accomplish estate planning goals that require the owner of property to relinquish all ownership and control of the property before getting certain benefits. For example:
- Estate Tax Planning: Irrevocable trusts are often used for estate tax reduction. When you transfer property into an irrevocable trust, you relinquish all ownership and control over the property (even though you may still be able to benefit from the property). Because the property is no longer yours and you can't control it, it's not included in your taxable estate, so you won't have to pay estate taxes on the property.
- Asset Protection: The same logic applies in the area of asset protection. When a judgment creditor acquires the right to attach your property in order to collect payment on a judgment, they can only reach "your" property. Property that's in an irrevocable trust is not yours, and it's not under your control, so it's beyond the reach of judgment creditors.
A revocable trust is a trust over which you retain control as long as you're alive and have mental capacity to control your own affairs. So, you can change the terms of the trust, or even cancel the trust altogether if you want to. They're extremely flexible, but because you retain control over the trust assets, a revocable trust can't be used for tax planning or asset protection. Instead, revocable living trusts are great for:
- Probate Avoidance: When you transfer property to a revocable living trust, it's no longer yours. Only property that belongs to you is subject to probate, so a properly funded revocable trust can help you avoid probate.
- Incapacity Planning: You can use your revocable trust to appoint a Disability Trustee. This person will take over the management of your trust assets if you become mentally incapacitated to the point that you're unable to manage your own affairs. This helps your family avoid the time, expense, and lack of privacy involved in going to court to have a conservator appointed for you.
Within the categories of "revocable" and "irrevocable" trusts, there are countless options for accomplishing your estate planning goals. A qualified estate planning attorney can help you determine which option is best for you.