Trusts are a legal tool that can be utilized for estate planning, asset management, or wealth transfer. Most trusts fall into two main categories: revocable or irrevocable.

A revocable trust is a trust that can be amended or revoked by the party creating the trust. An irrevocable trust is a trust that cannot be revoked or amended. Both types of trusts can be an important part of an estate plan.

The basics of revocable trusts

“Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium, tA revocable trust is the most common type of trust. It can be modified and controlled by the person creating the trust. The creator of the trust is referred to as a grantor, settlor or trustor.

Typically, the grantor of the trust will also serve as the initial trustee and will name a successor trustee or trustees to manage the trust in the event the grantor becomes incapacitated or upon death.

Designated assets are transferred into the trust, and the trust becomes the legal owner of those assets. While the trust legally owns the assets, the grantor can make changes or dissolve the trust at any time. A separate tax identification is typically not required for a revocable trust and no separate tax return would be necessary. Income on the trust assets would be reported under the grantor’s Social Security Number. A properly funded revocable trust can avoid probate at the death of the grantor and can help avoid a guardianship in the event a grantor is incapacitated.

While a revocable trust is an integral part of most estate plans, a revocable trust is not the answer to every situation. Assets in a revocable trust will be includable in your taxable estate for estate tax purposes. A revocable trust will likely not protect your assets from creditors and any assets in a revocable trust are still counted when evaluating eligibility for Medicaid.

The basics of irrevocable trusts

An irrevocable trust is a trust which cannot be amended or revoked. In most cases, revocable trusts become irrevocable upon the death of the grantor. Other types of irrevocable trusts can be created during a person’s lifetime and are typically utilized to address a particular concern and involve more specialized areas of law. Irrevocable trusts can be used for purposes of asset protection, wealth transfer, estate and/or income tax planning, charitable planning, medicaid planning and special needs planning.

Because these types of trusts involve complexities and require more training and knowledge on the part of the drafting attorney, the cost to prepare an irrevocable trust will be higher than a revocable trust.  

Assets in an irrevocable trust can be protected from creditors and/or protected for purposes of qualifying for Medicaid. In order to achieve protection, the assets must be removed from the grantor’s estate and the grantor can no longer benefit from the assets or have control over the assets.

An irrevocable trust is much more difficult to change. Making changes or terminating the trust can require the consent of all beneficiaries and sometimes approval by a court. If you create an irrevocable trust, you will most likely not be able to benefit from the assets held in the trust and will not be able to serve as trustee of the trust.

Which type of trust is best for you?

When choosing between a revocable or irrevocable trust, it’s important to identify your goals for creating a trust. Are you planning ahead for Medicaid eligibility later in life? Are you concerned about reducing potential estate tax? Are you selling a business and want to explore ways to reduce income tax? Do you want to make a plan for your assets but retain control?

Depending on your needs and goals, your estate plan could include both revocable and irrevocable trusts. After thinking about your goals for creating a trust, work with a qualified legal professional to fully explore the pros and cons of each kind of trust and make an informed decision.

Wright Law Firm has years of experience helping individuals and families create both revocable and irrevocable trusts through estate planning. Contact us today to schedule a consultation.