Trusts are a common estate planning tool, but choosing the right type of trust can be tricky. Some types are designed for specific situations, like a special needs trust or a pet trust. Others, like revocable and irrevocable trusts, offer great benefits – along with some restrictions and limitations. Knowing the difference between a revocable trust and an irrevocable trust is important when it comes time to consider setting up and funding a trust as part of your estate plans.
Revocable VS Irrevocable Trust – What Are The Differences?
To set up a trust, a trustor signs a trust document naming a trustee to handle the trust assets and one or more beneficiaries. Sometimes the trustor, trustee, and beneficiary are the same person. Once the trust document is signed, the trustor transfers assets to the trust. This is called funding the trust. Though all trusts begin with the trust document and funding, the actual management and distribution of the trust may be very different.
Some of the benefits of using a revocable trust, also known as a living trust or inter vivos trust, include:
- Flexibility. A revocable trust can be modified or revoked.
- Pre-planning. This trust can also be used to plan for incapacity or disability instead of relying on a guardianship or conservatorship.
- Probate. Avoids probate because assets are transferred to beneficiaries upon trustor’s death.
- Privacy. Information about assets transferred through a revocable trust do not become public record.
However, this type of trust is also limited in several ways:
- Ownership. Assets that fund the trust are still owned by the trustor.
- Creditors and Judgments. Under a revocable trust, assets are generally not protected from lawsuits and creditors.
- Benefits. A revocable trust may affect eligibility for public benefits like Medicaid.
- Taxes. Assets can be used to calculate estate and inheritance taxes.
As you might expect, there are pros and cons to using an irrevocable trust:
- Not as flexible. The irrevocable trust is well-named – it’s difficult and sometimes impossible to change the trust once the trust document has been signed.
- Control. The trustor no longer controls the trust assets.
- Asset Protection. An irrevocable trust can offer greater asset protection than a revocable trust.
- Estate Taxes. This type of trust offers the trustor the opportunity to lower a future estate tax assessment.
Is A Trust In Your Future & If You Do, What Kind?
To learn more about trusts and whether you might need to set one up, check out some of our free videos at keystonelaw.com. You can also call us at (480) 418-8448 to discuss your needs. We offer services for clients throughout Arizona, including Chandler, Gilbert, Sun Lakes, Tempe, Phoenix, Mesa, Scottsdale, and Apache Junction.