Making the decision about whether to set up a revocable trust or an irrevocable trust can be difficult. Both have their advantages and disadvantages, and it can be hard to know which is right for you.
In this personal finance guide, we will compare both trusts and look at the benefits and drawbacks of each. By the end of this article, you will be able to make an informed decision about which trust is right for you!
Revocable Trust Vs Irrevocable Trust Table of Contents
What is a Revocable Trust?
A Revocable Trust is a type of trust that can be modified or revoked at any time by the grantor. This type of trust is often used in estate planning, as it allows the grantor to change their mind about how they want their assets distributed after they die.
What is an Irrevocable Trust?
An irrevocable trust is a type of trust that cannot be modified or terminated by the grantor without the consent of the beneficiaries. This means that once you create an irrevocable trust, you give up all control over the assets in the trust.
The trustee (the person who manages the trust) will have complete control over how the assets are used and distributed.
What is The Difference Between a Revocable Trust and an Irrevocable Trust?
The main difference between a revocable trust and an irrevocable trust is that a revocable trust can be changed or revoked at any time by the grantor, while an irrevocable trust cannot be changed or revoked.
Revocable trusts are often used in estate planning, as they allow the grantor to change their mind about how they want their assets distributed after they die. Irrevocable trusts, on the other hand, are often used to protect assets from creditors or lawsuits.
What Are The Different Types of Revocable Trust?
There are two main types of revocable trusts:
- Living trust
- Testamentary Trust
A living trust is a trust that is created during your lifetime. It can be revoked or amended at any time, and you can also change the beneficiaries.
A testamentary trust is a trust that is created after your death, in your will. It cannot be changed or revoked after your death, and the beneficiaries cannot be changed.
What Are The Different Types of Irrevocable Trust?
There are four main types of irrevocable trust:
- Charitable Trust
- Spendthrift Trust
- Qualified Personal Residence Trust
- Life Insurance Trust
Charitable trusts are created for the purpose of giving to a charity or charities. The settlor (the person who creates the trust) can choose to give to one charity or many charities. The settlor can also choose to give a fixed amount of money or a percentage of the trust's assets.
Spendthrift trusts are created for the benefit of someone who is not good at managing money. The trustee (the person who manages the trust) can control how and when the beneficiary (the person who benefits from the trust) gets money from the trust. This can help the beneficiary stay out of debt and prevent them from spending too much money.
Qualified Personal Residence Trust
Qualified personal residence trusts are created to hold a person's primary residence. The house can be sold, but the proceeds must go to the trust. The trustee can use the money from the sale of the house to pay for the beneficiary's care.
Life Insurance Trust
Life insurance trusts are created to hold life insurance policies. The death benefit from the policy will go to the trust, and the trustee can use the money to pay for the beneficiary's care.
What Are The Advantages of a Revocable Trust?
A revocable trust, also known as a living trust, is a type of trust that can be modified or revoked at any time by the grantor. This flexibility can be advantageous in a number of situations.
For example, if you create a revocable trust but then your circumstances change and you want to make changes to the trust, you can do so. This might be the case if you get married or divorced, have children, or your financial situation changes.
Another advantage of a revocable trust is that it can help to avoid probate. Probate is the legal process that happens after someone dies, during which their assets are distributed according to their will.
If you have a revocable trust, your assets will not go through probate because they are already in the trust. This can save time and money, as probate can be a lengthy and expensive process.
Finally, a revocable trust can give you more control over how your assets are distributed after your death. For example, you can specify that your assets go to specific people or charities, or that they are used for specific purposes.
What Are The Advantages of an Irrevocable Trust?
The main advantage of an irrevocable trust is that it can protect your assets from creditors and lawsuits. If you have a revocable trust, creditors can go after the assets in the trust. But with an irrevocable trust, the assets are out of reach.
Another advantage of an irrevocable trust is that it can reduce your estate taxes. When you die, your estate is subject to estate taxes. But with an irrevocable trust, the assets in the trust are not part of your estate. That means your heirs can inherit more of your money.
What Are The Disadvantages of Revocable Trust?
The main disadvantage of a revocable trust is that it can be revoked at any time by the person who created it.
This means that if you change your mind about who should inherit your assets, or if you need to access the funds in the trust for any reason, you can do so. However, this also means that your beneficiaries may not receive the assets you intended for them to have, as you can change the terms of the trust at any time.
Another disadvantage of a revocable trust is that it does not offer the same level of asset protection as an irrevocable trust. This is because a revocable trust is still considered your personal property, and as such, it can be subject to your creditors if you ever declare bankruptcy.
Finally, revocable trusts are not typically used for estate planning purposes. This is because, as the name suggests, they can be revoked at any time. If you are looking to create an estate plan that will protect your assets and ensure that your beneficiaries receive them according to your wishes, an irrevocable trust is a better option.
What Are The Disadvantages of Irrevocable Trust?
There are a number of disadvantages to setting up an irrevocable trust, including:
You lose control over the assets in the trust. Once you've transferred ownership of your assets to an irrevocable trust, you can no longer make changes to it without the permission of the beneficiaries.
It can be difficult to set up. Irrevocable trusts are complex legal documents, and you'll need the help of a professional to set one up correctly.
It can be expensive to maintain. An irrevocable trust requires its own tax ID number and must file its own tax return each year. You may also need to pay a professional to manage the trust.
It may have negative tax consequences. An irrevocable trust is taxed as its own entity, which means it could be subject to a higher tax rate than you would pay on your own.
Your beneficiaries may not thank you. If you change your mind about who should receive the assets in your trust, you may not be able to make changes without the permission of the beneficiaries. This can cause hard feelings and family conflict.
So, Which One Should You Use?
The answer to this question really depends on your specific situation and what your goals are. If you're simply looking to protect your assets and ensure that they go to your loved ones after you pass away, then a revocable trust is probably the way to go.
On the other hand, if you're more concerned with estate taxes or asset protection from creditors, then an irrevocable trust might be the better option.
Of course, there are also a few other factors to consider, such as the cost and complexity of setting up either type of trust. Ultimately, it's important to sit down with a financial advisor or estate planning attorney to figure out which option is best for you.
What Are Some Alternatives to Using a Revocable Trust or an Irrevocable Trust?
If you're not interested in using a revocable trust or an irrevocable trust, there are a few other options available to you.
One option is to create a living will, which is a document that outlines your wishes for medical treatment and end-of-life care. This can be a good option if you want to have more control over what happens to your body after you die.
Another option is to create a power of attorney, which gives someone else the legal authority to make decisions on your behalf. This can be a good option if you become incapacitated and are unable to make decisions for yourself.
Finally, you could simply leave your assets to your loved ones in your will. This is a relatively simple process and can be a good option if you don't want to deal with the complexities of setting up a trust.
What Are Some Tips For Using a Revocable Trust?
Choose your trustees wisely. This is one of the most important aspects of setting up a revocable trust. Your trustees will be responsible for managing the trust assets and distributing them according to your wishes, so it’s important to choose people you can trust implicitly.
Be clear about your wishes. One of the main advantages of a revocable trust is that it gives you a great deal of control over how your assets are distributed after your death.
However, this can also be a disadvantage if you don’t take the time to spell out your wishes in detail. Make sure your trustees know exactly what you want them to do with the trust assets.
Monitor the trust closely. Once you’ve set up a revocable trust, it’s important to stay involved in its management. This means keeping an eye on the trustees and making sure they’re following your instructions. It also means keeping track of the trust assets and making sure they’re being used in the way you intended.
What Are Some Tips For Using an Irrevocable Trust?
If you are considering using an irrevocable trust, there are a few things that you should keep in mind.
First, you will need to make sure that you have a clear understanding of what trust is and how it works. Second, you will need to make sure that the trust is properly funded.
Third, you will need to make sure that the trustee is someone that you can trust. Lastly, you should always consult with a financial advisor before making any final decisions.