A Few Pros and Cons between Revocable and Irrevocable Trusts
The two basic types of trusts are the revocable trust and the irrevocable trust. A trust is an effective estate planning tool. Like a will, a trust controls what happens to a deceased person’s assets at death. Trusts are somewhat different from wills, however, because trusts can provide tax-planning opportunities and trusts avoid the probate process.
A trust is a legal entity that a person, usually called a grantor, establishes during their lifetime to hold their assets and then to distribute them to the trust beneficiaries at death. The grantor’s directions for how the assets should be managed form the trust agreement. Once assets are placed inside a trust, the trustee manages them by following the grantor’s directions as set out in the trust agreement.
A revocable trust is also known as a living trust. The grantor can continue to make changes and updates to this type of trust even after it’s created. For example, the grantor may choose to remove a beneficiary, add a new beneficiary, and modify the provisions that determine how the trustee manages the trust assets. In the case of a revocable trust, the grantor may be the trustee, appointing a successor trustee to take over after the grantor’s death.
Most importantly, revocable trusts offer ongoing flexibility during the grantor’s lifetime. For this reason, they tend to be easier to set up than irrevocable trusts. Additional benefits of a revocable trust include its capacity to replace the need for a conservator when it comes to holding real estate assets for a minor beneficiary. Also, the revocable trust can include guardrails for a spendthrift beneficiary who might not handle the money responsibly.
The revocable trust assets are not as protected from creditors as they would be in an irrevocable trust. This is because the grantor still retains some control over a revocable trust. If the grantor loses a lawsuit, the court can order the assets of the revocable be liquidated to satisfy judgment. Moreover, when the grantor of a revocable trust dies, the trust assets become subject to state and federal estate taxes.
As the name indicates, the grantor cannot modify an irrevocable trust after the trust agreement is signed. In exceptionally rare situations, an irrevocable trust may be modified either by a court order or by the consent of all the trust beneficiaries, but not all states permit this. Additionally, the grantor cannot be the trustee of the irrevocable trust. The grantor truly relinquishes control over the irrevocable trust assets.
This surrender of control affords two of the important benefits of an irrevocable trust: taxes and asset protection. The assets of an irrevocable trust are not subject to estate tax when the grantor dies. The grantor also has no tax obligation for any lifetime income the assets may generate. When it comes to asset protection, the irrevocable trust protects assets from creditors, including judgment creditors.
The grantor cannot modify an irrevocable trust once the trust agreement is signed. The agreement must be drafted and entered into only after careful consideration of all potential changes in circumstance. Because of this, an irrevocable trust can be more complicated and time-consuming to set up than a revocable trust.
Contact a Florida Estate Planning Attorney
To determine the best type of trust for your circumstances, work with a Florida estate planning attorney. Wherever you are in the process – whether starting your initial research into estate planning, or if it’s time to review an existing estate plan – Linda Solash-Reed, P.L. is here to help! Call our office at 321-804-2915 or fill out our contact form and we will be in touch to schedule a consultation.