What’s the difference between revocable and irrevocable trusts?
Estate planning might sound like something only older people need to worry about, but it’s actually important for anyone who wants to protect their assets and make sure their wishes are followed. Two common types of trusts are revocable and irrevocable trusts. Let’s break down what these are and how they differ.
Revocable Trusts: Flexibility and Control
Revocable trusts, also known as living trusts, are super flexible. You can change or get rid of them anytime you want. Here’s why they might be a good option:
Benefits:
- Skip Probate: When you have a revocable trust, your assets go directly to the people you choose (your beneficiaries) without getting stuck in the lengthy and expensive probate process.
- Manage Incapacity: If something happens to you and you can’t manage your own affairs, a successor trustee can step in and handle things for you.
- Keep It Private: Unlike a will, which becomes public during probate, a revocable trust keeps your details private so your personal information is not visible to anyone who cares to search for it on public records.
Drawback:
- No Shield from Creditors: Since you still control the assets, they aren’t protected from creditors.
Revocable trusts are great if you want to keep control of your assets and have the flexibility to make changes as your life evolves. They are particularly useful if you anticipate that your financial situation or family dynamics might change in the future. For instance, if you plan to buy a house, start a business, or have children, a revocable trust allows you to adapt your estate plan accordingly.
Irrevocable Trusts: Protection and Permanence
Irrevocable trusts are more rigid. Once you set one up, you can’t easily change it or take it back. Here’s what makes them special:
Benefits:
- Protect Your Assets: Because you give up control of the assets in the trust, they’re safe from creditors.
- Tax Perks: Irrevocable trusts can help reduce your estate taxes and sometimes even your income taxes.
- Qualify for Medicaid: These trusts can help you qualify for Medicaid without losing all your assets.
Drawback:
- Less Flexibility: You can’t directly and independently change the trust or get the assets back once they’re inside the trust. You will need the help of other people to ensure your trust retains its asset protection.
Irrevocable trusts are ideal if your main concerns are protecting your assets from creditors and potentially reducing capital gains on certain assets or estate taxes upon your death. They are also beneficial for long-term planning, such as ensuring that assets are preserved for future generations or supporting charitable causes. For young families, an irrevocable trust can be a way to secure funds for children’s education or to provide for family members with special needs.
Which Trust Should You Choose?
It depends on what’s more important to you. If you value flexibility and control over your assets, a revocable trust is probably the way to go. If you need strong asset protection and tax benefits, an irrevocable trust might be better. Consider your long-term goals, your current financial situation, and how much control you want to retain over your assets.
Whether you’re just starting to think about the future or you’re ready to make a plan, understanding the differences between these two types of trusts can help you make the best choice for your situation. Talking to an estate planning attorney can give you personalized advice to match your goals. Whether you want flexibility or protection, choosing the right trust can help you safeguard your future and ensure your assets are managed according to your wishes. Estate planning is not just for the wealthy or the elderly; it’s for anyone who wants to take control of their financial future and provide security for their loved ones.
Schedule your appointment today to discuss the benefits of each trust for your situation. We would love to help you craft your plan with different kinds of trusts that fit your needs.