For many people, crafting a well-rounded estate plan is a priority to protect loved ones. Most will equate this with the simplest type of estate planning document—a will. But there are other ways to prepare for the future. Notably, that includes a trust.
When thinking about a trust, it is wise to understand the options available. Depending on the individual’s needs, it is useful to be aware of revocable and irrevocable trusts, how they work, how they differ and which is likely to be applicable to a person’s specific case. With these somewhat complex matters, having experienced and attentive assistance can be imperative to making the right choice and ensuring a sufficiently comprehensive plan.
What should I know about revocable and irrevocable trusts?
There are differences between a revocable and irrevocable trust. Fundamentally, a revocable trust—as the name implies—can be revoked or changed whenever the person who funds the trust decides to do so or upon conditions when needed.
After the assets are placed into the trust, the responsibility for overseeing them falls on the trustee. This is an important job as the trustee will invest those assets and distribute them after the owner of the assets in the trust has died or has become incapacitated. Trusts can be useful for the owner to determine how their assets are used. Toward that end, they can put guidelines in place.
A revocable trust is flexible, even after it has been created. For example, if there is a beneficiary who must do certain things like complete a college degree before they have access to their share of the trust, they can be removed if they fail to complete the tasks as requested. Stipulations of use of trust funds can be added at any time as well.
The ability to make changes as the person sees fit might make a revocable trust seem to be the wisest option. Still, circumstances could warrant using an irrevocable trust. If there is concern that creditors could pursue the assets in the trust, the revocable trust’s funds are not protected from them.
They could be vulnerable to a lawsuit or if sudden bills arise and the person has no way to pay them. They are also going to be subject to the estate tax. The estate tax can be problematic for those with substantial wealth that they want to pass on to loved ones and heirs.
Also, a revocable trust is commonly used when beneficiaries are under 18 or are not deemed mature enough to handle sudden access to significant sums of money and property. In these cases, a conservator is needed if the owner of the trust dies.
Irrevocable trusts avoid many of these obstacles. It can be a worthwhile tradeoff for the security of knowing the assets in the trust are not as vulnerable as they are with a revocable trust. The irrevocable trust, for the most part, cannot be changed. If there is an attempt to change it, there must be agreement from all parties involved with it. That includes beneficiaries.
Being protected from tax implications is a good reason to have an irrevocable trust. Since the person’s assets are removed from the equation, it can save a large amount of money. It also frees the person from being taxed for income that the trust generated. A revocable trust also accords more privacy as its details cannot be shared outside of the person’s family. Legal cases can open the irrevocable trust up for others to see.
Experienced, professional representation can help with selecting a type of trust
Understanding the difference between revocable and irrevocable trusts is a first step to knowing which is the preferred option. Every person will have a different financial situation, family circumstances, objectives and goals. An estate plan can be tailored to those needs and ensure that the person’s needs are met.
Many might be under the impression that creating a trust, writing a will or any other document that is part of estate planning is something that can wait until a later date. That is a mistake. Consulting with professionals who are experienced in estate planning matters—especially trusts—can be helpful with addressing the person’s needs with a viable plan.