Estates and Wills: Should You Set Up a Revocable or Irrevocable Trust?
Estate planning is critical to preserving generational wealth. For many families, a living trust can streamline the process of transferring wealth after you die by eliminating probate and minimizing estate taxes.
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Many people think a revocable or irrevocable trust only benefits wealthy individuals and families. But that’s not true. “Trusts are for the middle class, too,” California-based estate planning and asset protection attorney Brittany Cohen says in a TikTok video.
What Is a Living Trust?
A living trust is a legal document you create before you die to hold your assets. When you die, the trust designates how your assets will be distributed. You will designate a trustee who will be responsible for ensuring assets are distributed according to your wishes, much like the executrix of a will.
Every trust has several parties involved:
The Grantor: The person who establishes the trust
The Beneficiary or Beneficiaries: Parties who receive the assets of the trust upon the grantor’s death
Trustee: The person who ensures the terms of the trust are followed
Successor Trustee: A second person who can take over for the trustee if the trustee is incapable of fulfilling the duties or has died
There are two kinds of living trusts: revocable and irrevocable. Let’s look at the key differences between the two.
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Revocable vs. Irrevocable Trusts
Revocable trusts, as the name implies, can be altered or canceled the creator (grantor) of the trust at any time up until the person’s death. The grantor can transfer assets into and out of the trust, modify the terms of the trust, and change the trustee, successor trustee and beneficiaries at any time. As the grantor, you can also designate someone else to control and manage the trust should you become physically or mentally incapable of doing so.
Upon the grantor’s death, a revocable trust becomes irrevocable and cannot be changed by the trustee or any other party.
Irrevocable trusts cannot be changed easily by any party, including the grantor. You can’t cancel the trust or remove funds from it. You also can’t change the trustee, successor trustee, or the beneficiaries. You can, however, add assets to an irrevocable trust.
In some cases, an irrevocable trust can help protect the assets in your estate as well as the assets of your heirs.
Both an irrevocable trust and a revocable trust can also help you avoid probate, which is necessary when assets are inherited through a will.
When you’re considering a revocable vs irrevocable trust, what do you need to know? Which one is better for most people?
What Is Better: A Revocable or Irrevocable Trust?
In most situations, a revocable trust is better because most people want the ability to move their assets around and spend their money as desired. A living revocable trust provides this advantage.
A revocable trust also allows you the freedom to change your mind about the trustees and beneficiaries. If family relationships, friendships, or business relationships change over time, you might wish to change beneficiaries. You can do this with a living revocable trust.
Advantages of an Irrevocable Trust
Certain situations may call for an irrevocable trust, however. Understanding the advantages of an irrevocable trust can help you make the right decision.
An irrevocable trust takes away your control of your assets. But if you have money or property you plan to hold onto, specifically for your heirs, an irrevocable trust can help protect those assets.
An irrevocable trust removes assets from your estate, which means your heirs won’t pay estate taxes on it. However, irrevocable trust assets may be taxed at a different rate. The trust may be responsible for paying income tax on undistributed gains. The beneficiary may also pay income taxes on money withdrawn from the trust after your death.
It’s important to speak to a lawyer and tax accountant or tax attorney to discuss the tax ramifications of an irrevocable trust.
An irrevocable trust can also protect the beneficiary’s inheritance from collections or creditors. Money in an irrevocable trust does not have to be used to pay debts.
Finally, when a Medicaid beneficiary dies, often their estate will be used to repay expenses covered by Medicaid, including nursing facilities, home care services, hospital stays and services, and the costs of prescription drugs. Funds held in an irrevocable trust cannot be used for this purpose.
Final Note
If you want to maintain control of your assets until you die but keep your assets out of probate upon your death, a revocable trust might be the best answer. Revocable trusts are not just for wealthy individuals, but for anyone who will be leaving assets to their children or other heirs.
Financial expert Dave Ramsey has said that if you “hate the people in your family, leave unclear instructions [regarding your death], and no will.”
However, Cohen pointed out a will won’t help your loved ones avoid probate. A living trust can simplify the transfer of assets after your death. “”It’s whether you want them to have to go to court or you want it to all be laid out very easy for them to take ownership,” she said in a TikTok video reported by MoneyWise.com.
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This article originally appeared on GOBankingRates.com: Estates and Wills: Should You Set Up a Revocable or Irrevocable Trust?
