Protecting yourself and your family often takes center stage, but the spotlight can brighten when planning the future of your estate. When you're considering how to secure your financial future, create privacy for your family and control how assets are distributed, trusts can be a useful tool.
What is a revocable trust?
You create the trust by executing a written trust document and then transferring ownership of your assets to the trust.
There are some key features of revocable trusts:
- They can be modified, changed, added to, or canceled at any point during your lifetime. If you change your mind, your financial circumstances change or your relationships with your loved ones change, you can adjust the trust as you see fit.
- You can be your own trustee, managing and controlling your assets. However, you also must select a successor trustee to step in if you become incapacitated or pass away.
- Nothing in the trust is permanent, and you can alter bequests or move assets in and out as your life circumstances change.
What is an irrevocable trust?
Consider these key features of irrevocable trusts:
- They generally cannot be changed or canceled. You should be certain about the terms when you set it up because once you do it, it's final.
- Typically, you'll name someone other than yourself as a trustee to manage and control the assets.
- Assets in these trusts don't count for determining Medicaid eligibility as long as assets are transferred before what is known as the "lookback period." When a person files a Medicaid application, the state looks back from the application date to see if the applicant or their spouse made any gifts during that period.
- Creditors can't access irrevocable trust assets, even if you file for bankruptcy or have judgments issued against you.
- The assets don't count toward your total taxable estate, so you may be able to avoid estate taxes altogether with this type of trust.
The availability of the above features will vary and should be carefully considered with an experienced estate planning attorney and tax planning advisor.
Learn how a will and a trust can work together to protect your assets and intentions.
Benefits of revocable & irrevocable trusts
Revocable and irrevocable trusts both provide worthwhile advantages:
Trusts provide privacy
Both types of trusts are private records, not public. This is in contrast to
Trusts avoid probate
Because a trust controls the transfer of assets after your death, no asset placed in a trust needs to go through probate. That means there is no court oversight or control. By skipping probate, you also avoid the costs and delays that can be associated with that process. The trustee follows the instructions for passing assets to beneficiaries according to the trust's terms. However, if you want to avoid both probate and estate taxes, an irrevocable trust is the option to consider.
Trusts give you creative control
When assets pass through a will, they're transferred after probate concludes. A trust, in comparison, allows you to control how and when your beneficiaries receive distributions. You can decide if assets will transfer immediately on your death, or you can set a date (such as specific birthdays) to trigger the distributions. This allows you to have some control that lasts even after you've passed away to protect and guide your loved ones. Note that a revocable trust gives you the ultimate level of control because you can make any changes you want to it during your lifetime.
Trusts protect you if you become incapacitated
Either an irrevocable trust or a revocable trust provides for a trustee who will manage your assets should you become unable to do so yourself. By having a trustee in place, you won't have to worry about who will manage your assets if something happens to you. Plus, you can avoid having a financial guardian appointed.
Trusts provide safety
Because you choose the trustee, you can ensure that someone who shares your values will manage and control the assets. Trusts are generally more difficult to contest than wills and may be more likely to withstand attempted legal challenges, so they can provide you with a sense of predictability and security.
Revocable vs irrevocable trusts at-a-glance
Flexibility to modify the trust—including terms, beneficiaries, and assets—at any time
No flexibility to modify the trust except in rare, specific circumstances
Easy to cancel entirely
Generally unable to cancel
No estate tax shelter
Potential for estate tax shelter
Can keep direct control of assets, using them as you normally would
No direct control of assets; trustee decides how they're used
Ability to be your own trustee
Not recommended to be your own trustee
Asset distribution avoids the probate process
Asset distribution avoids the probate process
Key questions about revocable & irrevocable trusts
Which type of trust will reduce taxes?
Because an irrevocable trust transfers assets out of your ownership and control, they are not part of your taxable estate and therefore aren't subject to estate tax. If you have assets over the gift/estate tax exemption amount (
Which trust lets you stay in control of your assets?
You can change or cancel a revocable trust during your lifetime. You can add or remove assets from the trust, change trustees, change beneficiaries, change bequests, tinker with the terms of the bequests and more. It's a living document (and legal entity) that can grow and change with you.
In contrast, once you set up an irrevocable trust (except in rare, specific circumstances), you cannot make any changes to it.
How complicated is a revocable trust to use?
Assets in a revocable trust aren't locked away forever. You can continue to use them, spend them, sell them, and add to them. But for the trust to be operational, it's crucial that you officially transfer ownership of the assets to the trust. Many people will sometimes overlook placing all their assets into the trust, which could cause unintended consequences for your beneficiaries.
Another potential complication arises from the need to administer assets within the trust. If the trust owns your asset, all business for that asset must be conducted through the trust. So, if you put your home in the trust, you'll have to change your homeowners insurance to be in the name of the trust (or at least have the trust named as an additional insured). If you wish to deposit funds into an account owned by the trust, checks must be made out in the name of the trust.
How set in stone is an irrevocable trust?
An irrevocable trust is essentially locked up and untouchable once you create it. If you change your mind or your circumstances change, you cannot cancel or revoke it. The payoff for this level of permanence is that it truly can protect your assets from creditors and potentially reduce the tax burden on your heirs.
If you had a revocable trust that gives you access to the things in the trust, the assets would be considered within your control, and creditors would be able to lay claim to them. An irrevocable trust can seem stringent, but restrictions are in place to make sure the assets are wholly protected.
Deciding which type of trust is best for you
When choosing between a revocable trust and an irrevocable trust, ask yourself several questions:
- Do I want to be able to use or access my assets while I'm alive? If "yes," a revocable trust is your best option.
- Do I want to be able to make changes to the trust after I create it? If "yes," a revocable trust will be the one to choose.
- Do I want the trust to protect my assets from creditors, estate tax and Medicaid inclusion? If "yes," an irrevocable trust will provide these protections.
Both types of trusts have benefits and drawbacks, so it's important to set up the type of trust that best helps you to meet your goals. Talking over your goals with a