While most of us have heard of “trusts,” few understand the differences between the various types of trusts, specifically revocable and irrevocable trusts. These two types of trusts are discussed most often within the broader topic of estate planning. However, the differences between these types of trusts—and when (and how) they should be used—is where things start to get confusing for many people.
What are the differences?
With a revocable trust, the trustor (also known as the “Grantor”)—or creator of the trust—retains ownership of the trust and it’s assets throughout their lifetime. It is not until the trustor passes away that the trust assets are distributed to the trust beneficiaries. An irrevocable trust is when the assets within the trust no longer belong to the trustor. Rather, the trust assumes ownership of the assets.
Modifying the Trust
If you are considering setting up a trust for your beneficiaries, you should consider the type of control you’d like to retain over the trust. The main difference between an irrevocable trust and a revocable trust is the ease of which the trust can be altered after it is created and executed.
Like we stated above, the creator of a revocable trust will retain ownership of the assets within it. With a revocable trust, the trustor can make changes to the trust, modify terms, or even revoke the trust completely.
In comparison, an irrevocable trust is one that is permanent once it is signed and funded. Only in extreme cases can the irrevocable trust be changed at a later date, which normally requires going through a lengthy court process. The language used to define an irrevocable trust normally indicates that the trust cannot be changed or modified.
How Assets are Protected
Another distinction between a revocable and irrevocable trust is how its assets are protected. With a revocable trust—because the individual who created the trust is still in control of its assets—this type of trust is not protected from creditors of the trustor. For example, if an individual set up a revocable trust and had a major lawsuit against them, the court could seize assets from the trust to pay for the lawsuit. However, an irrevocable trust transfers ownership of assets after it is put in place. Therefore, assets within the trust are not “owned” by the trustor anymore. This means that assets within the trust are not vulnerable to being seized by a creditor.
Taxes, Taxes, Taxes
An additional consideration is how much you want to pay in federal or state estate taxes. Since an irrevocable trust is no longer owned by the trustor, the assets within it are no longer included in the total value of the trustor’s estate.
However, since the revocable trust is owned by the trustor, the assets within the trust are included in the total value of the trustor’s estate, and are eligible to be taxed.
We Can Help To learn more about revocable and irrevocable trusts and which type is right for your needs, please do not hesitate to contact the dedicated team at Polaris Law Group or join us at an upcoming estate planning workshop.