What type of trust should I use? We see this question asked all the time. It becomes more of a pressing matter if you have a family. And you’re probably reading this because you want that peace of mind that comes with finally knowing you made the right decision after weighing your options carefully.
Well, brace yourself for an informative short read that will empower you to make the best decisions for your family's future. By the time you’re done reading this, you will have zero confusion or hesitation. You’ll walk away with confidence knowing you’ve made the right choice on the best way to move forward. You’ll have decided once and for all which trust option – revocable or irrevocable – is the perfect fit for you and your family.
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What is a Trust?
A trust in this case is a legal arrangement in which you (the trustor or settlor) transfer ownership of your assets to another party (the trustee) to hold and manage those assets for the benefit of a third party or parties (the beneficiaries). The trustee has a fiduciary duty to act in the best interests of the beneficiaries and follow the instructions laid out in the trust agreement.
In most cases, this trustee is your lawyer, and the beneficiaries are members of your family or someone you trust enough to want them to take possession of your asset(s) later on.
What is the most popular type of trust?
Now that you have an idea of what trust is, what are your options? What types of trust are mostly used and for what reasons?
While there are several types of trusts, we promised to keep this short, sweet, and hit critical points, so you walk away with actionable information.
There are 2 most popular types of trust widely used in the US. the revocable and irrevocable trust.
Let’s dive into each to figure out which is best for you individually and for your family in general.
What is a Revocable Trust?
A revocable trust, also known as a living trust, is a trust that can be modified, amended, or revoked by the trustor during their lifetime. The trustor, in this case, you, retains control over the assets placed in the trust and can change or cancel the trust's provisions (content) at any time.
This can be a good option if you want to establish a Trust while maintaining control over your estate and assets while you’re alive. Keep in mind that once you fund a regular Trust, the Trust becomes the owner, not you. In other words, the Trust becomes a separate legal entity with its own ownership and management structure.
Upon death, a Revocable Trust automatically becomes Irrevocable and cannot be changed.
Benefits of a Revocable Trust
Revocable Trusts offer several unique benefits that make them stand out:
- Flexibility: One of the key advantages of Revocable Trusts is their flexibility. Here you have the freedom to make amendments whenever you desire, making them generally easier to modify compared to a Will.
- Avoidance of Probate: By creating a Revocable Trust, you can save your loved ones significant time, money, and, more importantly, stress. This is because Revocable Trusts bypass the probate process, ensuring a smoother transfer of assets to your beneficiaries.
- No Need for Original Documents: Unlike Wills, which require the presence of the original document for validation during probate, Revocable Trusts do not go through this process. As a result, you don't need to worry about keeping track of an original document, simplifying matters for your loved ones after your passing.
- Continuous Asset Management: Even in the event of your incapacitation, a properly funded Revocable Trust ensures that the assets held within it will continue to be managed without any interruptions, giving you that much-desired peace of mind knowing that your affairs will be taken care of according to your wishes.
Another important benefit of Revocable Trusts is that they maintain the availability of your property and assets, even if you become incapacitated. While having a Durable Power of Attorney (POA) can serve a similar purpose, it can be complicated to navigate. With a Revocable Trust, you can ensure that your property and assets remain accessible and manageable, even during incapacity.
In summary, Revocable Trusts offer the advantages of flexibility, probate avoidance, simplified document requirements, continuous asset management, and ease of access, making them a valuable estate planning tool.
Disadvantages of a Revocable Trust
Although Revocable Trusts offer numerous advantages, it's important to consider the potential downsides as well. Here are some of the possible disadvantages associated with Revocable Trusts:
- No Tax Advantages: Unlike certain types of trusts, Revocable Trusts do not provide any tax benefits for income taxes or estate taxes. They are primarily designed for estate planning and management purposes, rather than tax savings.
- Limited Asset Protection: While Revocable Trusts offer benefits during your lifetime, they do not provide significant asset protection from creditors. Your assets held within a Revocable Trust may still be vulnerable to creditor claims, similar to if they were held in your individual name.
- Need for Updates: Unlike Wills, which can automatically update or adjust based on major life events like the birth of a child or a divorce, Revocable Trusts require conscious updates. It is essential to periodically review and update the trust provisions to ensure they align with your current wishes and circumstances.
- Administrative Work: Funding a Revocable Trust involves the process of retitling assets to be owned by the trust. This can be time-consuming and may require administrative work. However, not all assets need to be retitled, as some may already pass through the trust via beneficiary designations or joint ownership.
It's crucial to carefully evaluate these potential drawbacks and assess whether they outweigh the benefits of a Revocable Trust in your specific situation. Consulting with a qualified estate planning attorney can provide personalized guidance and help you make informed decisions regarding your estate planning needs.
What is Irrevocable Trust?
An irrevocable trust is a trust that cannot be modified, amended, or revoked once it has been established. There are only a few, very specific, very isolated instances that would allow for an Irrevocable Trust to be modified. And in most cases, changes must be approved through the permission and consent of all named Beneficiaries.
Once the assets are transferred to an irrevocable trust, the trustor gives up control and ownership over them. This type of trust is often used for asset protection, estate tax planning, and to protect assets from creditors or legal claims.
Benefits of an Irrevocable Trust
You may wonder why anyone would consider an Irrevocable Trust, given its strict nature. However, surprisingly, there are distinct benefits associated with this type of trust. Let's explore them:
- Estate Tax Benefit: One major advantage of an Irrevocable Trust is its potential to mitigate estate taxes. Assets transferred into an Irrevocable Trust do not contribute to the value of your estate. This can be particularly advantageous for individuals with significant wealth. For instance, estates valued above a certain threshold, such as $12.92 million in 2023 ($25.84 million for couples), are subject to federal estate taxes. By utilizing an Irrevocable Trust, you can strategically minimize the impact of estate taxes on your wealth, or that of your family, allowing more to pass to your beneficiaries.
- Asset Protection: An Irrevocable Trust can serve as a shield, safeguarding assets from potential legal judgments and creditors. This feature can be especially valuable for individuals with high-profile careers or those who anticipate being susceptible to lawsuits. By placing assets within an Irrevocable Trust, you establish a layer of protection, helping to preserve your wealth from potential claims.
- Access to Government Benefits: Interestingly, having substantial wealth can sometimes hinder your eligibility for certain government benefits, such as Medicare and Supplemental Security Income. By utilizing an Irrevocable Trust, you may be able to structure your assets in a way that allows you to qualify for such benefits without depleting your savings or assets. This strategic approach can be instrumental in preserving your wealth for the benefit of your heirs, while still accessing the necessary government assistance.
Considering these advantages, it becomes clear that an Irrevocable Trust can be a valuable tool for estate planning, a need for asset protection, or a desire to optimize eligibility for government benefits.
Disadvantages of an Irrevocable Trust
While there are notable benefits to an Irrevocable Trust, it's essential to consider the downsides as well. Let's explore some of the potential disadvantages:
- Lack of Flexibility: The primary drawback of an Irrevocable Trust is its irrevocable nature. Once it's established and finalized, you generally cannot make changes to its terms. This lack of flexibility can be a significant downside if you anticipate needing to modify the trust in the future.
- Higher Tax Rates: An Irrevocable Trust is treated as a separate entity for tax purposes. Any income generated by the trust is typically subject to separate taxation, often at higher rates than individual income tax rates. This can result in increased tax burdens and reduced after-tax returns on trust earnings.
- Additional Tax Return: In addition to personal tax returns, an Irrevocable Trust generally requires its own tax return to be filed. This additional administrative requirement can lead to extra costs associated with the preparation and filing of the trust's tax return.
- Complex Language and Terms: Irrevocable Trusts often involve intricate trust terms and legal language. These provisions can be challenging to comprehend for individuals without a legal background. The complexity of the terms may necessitate seeking professional advice to ensure a thorough understanding of the trust's provisions and implications.
Considering these potential downsides, it's crucial to weigh them against the advantages and evaluate whether an Irrevocable Trust aligns with your specific needs and goals. Consulting with an experienced estate planning professional can provide invaluable guidance in making informed decisions about the suitability of an Irrevocable Trust for your circumstances.
Key Differences
Beyond the fact that a revocable trust can be modified, and an irrevocable trust cannot not be changed, there are several other distinctions between the two.
- With a revocable trust, you as the grantor can also serve as the trustee; this is not possible with an irrevocable trust.
- A revocable trust is safeguarded and private when it is created. This implies that the information in the trust is kept within the family upon the death of the grantor. If you create an irrevocable trust, records of its establishment may be made public in the event of the estate being involved in a legal action.
Frequently Asked Questions
Are Most Family Trust Revocable or Irrevocable?
Revocable trusts are usually more common due to their flexibility, and the fact that most Americans' estates won't be subject to estate taxes. You may want to consider a revocable trust if: You want the transfer of your assets to your heirs to be private and avoid the probate process.
And just in case you’re like us, you prefer that peace of mind that comes with making sure your Trust is secure and kept away from foreign influence. Here’s an article to guide you in taking that extra step to secure your Trust and other crucial assets for your family and loved ones.
What Type of Trust is Best for a Family?
It’s important to note that this is completely subject to preference. Many studies and materials online have shown that Irrevocable trust if mostly preferred among individuals with family to care for.
An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're omitted when the IRS values your estate to determine if taxes are owed.
Also, when the grantor of an irrevocable trust dies, the trust continues to exist and its assets are managed and distributed according to the trust's terms and instructions. It’s fair to say that irrevocable trust is the safest.
However, none of these is necessary when you have an IronClad Family account. Read on to find out how this helps you.
What Next?
Another popular question we’ve noticed is “What is the strongest type of trust?”. The answer to this is purely subjective. Both revocable and irrevocable trusts are both formidable in their own way.
But what if you wanted an IronClad solution? A solution that is bulletproof enough that nothing can alter it without your permission, yet flexible enough that you can make changes to it any time you want, without having to go through a long list of legal processes to make changes to your own asset.
That’s why I’d like to introduce to you the IronClad Family’s Estate Plan Wizard. This is a section of your dashboard where you have free access to lawyer-approved templates to help you plan your estates the right way, on your terms. Additionally, you can store your Trust (preferably revocable, for easy modifications) and have access to it at any time from anywhere in the world.
To find out more about how the IronClad Family platform benefits both you and your family, click here.
