What are the differences between an Irrevocable Trust and Revocable Trust?
We wanted to put together an easy list of things that highlighted some of the main differences between irrevocable trusts and revocable trusts.
How an Irrevocable Trust helps with Asset Protection?
An Irrevocable Trust essentially redistributes your assets and the person setting up the trust no longer owns the assets. The trust itself owns the assets. Therefore, if someone tries to sue you, they will see you have no assets and the lawsuit itself will not yield much value. Since most lawyers are contingency fee lawyers, these cases don’t make sense to them. Even if they did win the case, they wouldn’t get paid much since there would be little if any assets to draw judgement upon.
A revocable trust is more positioned for asset continuity instead of protection. Creditors can still go after assets in a revocable trust.
How do Irrevocable Trusts help with Taxes?
One of the largest advantages with an Irrevocable Trust is that it helps you avoid the Estate Tax. When you die, you technically own nothing so there is nothing to tax.
A revocable trust does not provide any additional tax advantages that are not available to a regular person. However, you can structure the revocable trust with certain provisions to help delay the estate tax by utilizing the unified tax credit. This will require the creation of two trusts though.
Does an Irrevocable Trust help with Probate?
Probate is a mess. It is the time period when the court decides who the rightful heirs are and how the assets should be distributed. This may be helped by having a will drawn up before you die, but it is not a guarantee. An irrevocable trust helps avoid this process completely. The answer is Yes, an irrevocable trust helps significantly with probate, by eliminating all together!
Revocable trusts also avoid probate. It is important to structure the trust with clear instructions in the case of your death or the trustee’s death.
Can I still donate to charity if my assets are in an Irrevocable Trust?
Yes, you can still donate to charity but the donation will come from the Trust instead of your name. Once again you personally will not own anything with an irrevocable trust.
With a revocable trust you can still donate to a charity.
What are the main disadvantages of an Irrevocable Trust or Revocable Trust?
An Irrevocable Trust does have disadvantages and may not be for everyone. However, the disadvantages are quite minor compared to the vast benefits the trust offers.
Disadvantages of Irrevocable Trusts are:
- The assets or property must be transfered. This involves some costs for paper work and potential legal fees. Make sure to ask your trust advisor on how much these fees might be.
- You relinquish control of your assets with the trust. This is done to ensure a higher level of protection. Your level of control is really determined by the Trust Executor you choose.
- A trust is its own entity and will require someone to prepare taxes for it every year. Once again this is a rather minor issue.
- Once property is transfered into an Irrevocable Trust, it is not reversible.
- Once again assets must be transferred into the Trust. There may be fees associated with the transfer.
- A revocable trust may complicate how you access the property.
- If you have hired a trustee to execute the trust, you may need to pay them yearly.
- The biggest disadvantage with the revocable trust is that there are no immediate tax advantages. You are still subject to the death tax.