WHAT IS THE DIFFERENCE IN A REVOCABLE AND IRREVOCABLE TRUST?

WHAT IS THE DIFFERENCE IN A REVOCABLE AND IRREVOCABLE TRUST?

People are often confused by the terms "living" trust and "revocable" trust, but the main thing to know is that both terms refer to a trust that can be changed. It is a "living trust because it is established during the lifetime of the Grantor (defined as the person who is making the trust), and it is usually for his or her benefit. It is "revocable" because it can be changed at anytime during the lifetime of the Grantor. When it comes to understanding trusts knowing the difference between revocable and irrevocable trusts is crucial. If you want a trust you can change and you get one that cannot be changed it will have serious consequences and vice versa.

A trust is designed to provide for ways to hold assets during the lifetime of the Grantor for the Grantor's lifetime benefit or for the benefit of beneficiaries, such as children or a spouse. A revocable trust is a very flexible instrument and allows the Grantor to use the funds as desired during his or her lifetime. Assets can be added to the Trust or removed from it by the Grantor through Trust Amendments until his or her death. The Grantor can even totally eliminate the trust or change it completely by a Trust Amendment and Restatement. The Grantor is normally the beneficiary of this type of Trust instrument.

The down side to all of that flexibility is that assets given to the trust are still considered as the Grantor's personal assets for creditor and estate tax purposes. This means that a revocable trust offers no creditor protection if you are sued. All of the trust assets will be considered yours for Medicaid planning purposes, and all assets held in the name of the trust at the time of your death will be subject to both state and federal estate taxes and state inheritance taxes. The purpose of this type of revocable living trust is simply to avoid a probate of the trust's assets after the Grantor dies, and to save the probate costs for the family. A trust will also take time and cost money to settle, but it is generally easier and less expensive than a full probate without a trust.

In addition to avoiding probate, the revocable trust is often used for tax purposes. With a married couple, a revocable trust can reduce the amount of federal estate tax due because the assets can be removed by the trust from the control of the surviving spouse at the death of her spouse, thereby reducing the taxes on the trust assets.

An irrevocable trust, once created, cannot be changed by the Grantor, and it is important to note that when the Grantor of a revocable trust dies, a revocable trust becomes an irrevocable trust. The Irrevocable Trust becomes a "person" in the eyes of the law with its own tax identification number and the person directed by the Grantor to manage the trust, the Trustee, must be someone other than the Grantor. The irrevocable trust can usually only be changed by order of the court. Often this type of trust is used when a person wants to give away money or other assets to another person or entity, but they want to have certain conditions attached that they do not want changed. Once the Grantor gives the assets to the trust, the Trustee is in complete control of the assets, and must follow the terms and conditions directed by the trust, not the Grantor or person who gave the trust its assets. This type of Trust is sometimes used for tax advantages and it can be used for Medicaid planning purposes or to protect assets from creditors or even to protect a beneficiary who does not handle money well from spending all the Trust Assets. Call us today for an appointment to learn more about what you can do to protect your family and your assets.