A revocable trust is a form of trust that allows for alterations or cancellation at any point should the grantor choose to do so. This flexibility also allows the grantor the option to add or remove beneficiaries. Created during your lifetime, a revocable trust allows you to maintain control over your assets. Because of this flexibility, however, a revocable trust does not offer asset protection in the event of creditors or lawsuits.
There are a number of benefits that you can enjoy by setting up a revocable trust. Here are just a few of those benefits:
Avoid Probate. Utilizing a revocable trust can save your beneficiaries the time, money, and hassle of going through probate court, which determines how the assets of the deceased are distributed. Probate can end up as a long and complex process. A revocable trust can help your family receive your assets quicker and without hassle.
Express and Protect Your Wishes. When you implement a revocable trust, you still maintain control of the assets you have placed in the trust. As long as you are able, you will have full control of your assets and the plan for how they will be distributed upon your passing.
Allow Flexibility. Unlike with an irrevocable trust, a revocable trust allows you flexibility in management. This means that you can make changes to the trust, amend details and amounts, add or remove beneficiaries, or terminate the trust at any point should you choose to do so.
An irrevocable trust acts just like that of a revocable trust, except for the main difference in which you cannot make changes to the trust. Once the trust is created, the terms are considered permanent. In this way, once the details of the trust have been specified and the grantor signs the legal document, the assets put into the trust now belong to the trust and its stipulations.
Three of the most common types of irrevocable trusts are life insurance, A–B, and charitable.
A life insurance trust allows a life insurance policy owner to put their policy in the trust. Once the policy owner passes away, the insurance benefits are paid to the irrevocable trust and therefore not included in the estate. Through the trust you can ensure the insurance money is paid to the appropriate beneficiary.
An A–B trust is most commonly used by spouses with high-incomes in an effort to avoid estate taxes. When the first spouse passes, the trust splits into Part A and Part B. The assets in Part A stay put, while the assets in Part B transfer to the surviving spouse. Once this spouse has also passed, the entirety of the trust (Parts A and B) goes to the couple’s chosen beneficiaries.
Charitable trusts are set up in the event that you wish to donate a part or the entirety of your estate to charity. A charitable trust can be set up to first pay your beneficiaries then provide the rest to charity or vice versa.
Irrevocable trusts come with their own benefits, as well. Here are a few of the benefits you can enjoy with an irrevocable trust:
Lawsuit Protection. Setting up an irrevocable trust allows you to transfer ownership of your assets to the trust. By doing this, you create a thorough shield of protection from lawsuits that can no longer go after anything you have put in the trust.
Reduce Estate Tax. When you give up ownership of the assets placed in your trust, those assets technically cannot be taxed when you pass away. Estate tax rates can be massive, so it’s a thoughtful practice for your beneficiaries to move those assets into an irrevocable trust.
Lower Taxes. Another important factor to keep in mind is eligibility for certain government programs. These programs for seniors and those with disabilities have strict determinations concerning income levels. So, you may find that an irrevocable trust can help you lower your taxable income so that you or your family member can continue in the program.
When comparing revocable trusts with irrevocable trusts, you will want to keep in mind what you are hoping to achieve with your trust and what you prioritize in the handling of your assets. Revocable trusts offer a great deal of flexibility and allow for revocation at any point. Most land trusts are revocable for this reason.
Irrevocable land trusts are rarely used because of how much they limit flexibility. Some opt for a particular irrevocable trust called an "asset protection trust", however, these are more expensive and come with many additional rules. An irrevocable trust trades control and flexibility for fewer taxes and asset protection, while a revocable land trust is generally used for privacy and to avoid probate.