Trusts can be powerful, effective estate planning tools. At the most basic level, trusts allow individuals to determine how their assets are managed during their lifetimes and distributed upon their deaths. There are two general types of trusts – revocable and irrevocable. (And, within those general distinctions, there are many “specialized” types of trusts that can be created.) Revocable and irrevocable trusts serve different purposes and each offers unique advantages–and disadvantages. It is important to understand the benefits and limitations of each type of trust (and consult with an estate planning attorney) before choosing the best vehicle for your unique situation.
Revocable Trusts
A revocable trust is one that—simply put—can be changed or terminated after its creation. In a revocable trust, the grantor retains ownership and control of his or her assets after the assets are placed into the trust; the grantor can be both the trustee (the person who manages the assets) and the beneficiary (the person who benefits from the trust) of the trust.
Advantages of a Revocable Trust
- Avoid Probate: Assets properly transferred into trust generally avoid probate. This is useful if the beneficiaries need access to the trust property quickly (such as if a business needs to continue to operate) or if the grantor is concerned about tension in the family.
- Privacy: The terms of the trust are private, whereas the terms of a will are public.
- Incapacity Planning: A trustee can be replaced by a nominated successor trustee if the trustee loses capacity, dies, or resigns.
Limitations of a Revocable Trust
- No Asset Protection: Because the grantor retains control over the trust assets, the assets are deemed available to creditors.
- Tax Liability: A revocable trust does not remove the assets from the grantor’s estate, so it cannot help avoid estate taxes.
Irrevocable Trusts
An Irrevocable Trust cannot easily be modified. The grantor typically relinquishes all control over the assets, transferring ownership of the assets to a third-party trustee.
Advantages of an Irrevocable Trust
- Asset Protection: The grantor’s creditors typically cannot reach the trust’s assets.
- Medicaid Planning: Irrevocable trusts can be used as part of a Medicaid planning strategy. (N.B.: The grantor’s individual circumstances must be carefully considered before utilizing an Irrevocable trust for this purpose.)
- Tax Benefits: Irrevocable trusts can be used to help reduce estate taxes, and, in other cases, they can offer income tax benefits.
- Gifting: Irrevocable trusts can be used to structure gifting of the grantor’s assets to beneficiaries over time.
Limitations of an Irrevocable Trust
- Loss of Control over assets transferred into the trust.
- Tax Implications: Trusts have compressed tax brackets, which may result in greater taxes paid. Trust beneficiaries may also incur tax obligations when they receive distributions.
- Complexity: Irrevocable trusts are often more complex to create and administer as compared to a revocable trust.
How do I choose between a revocable and an irrevocable trust?
There is no “one size fits all” answer to estate planning. Every client’s goals and portfolio is unique. Some clients are perfectly served by a Will while others are more comfortable with the privacy and expediency of a trust. If a trust sounds like a better vehicle for you, we encourage you to consider the costs to establish, fund, and administer the trust; tax implications; flexibility to modify your trust; protection from creditors; medicaid or long term health planning; and comfort with relinquishing control of your assets (and to meet with us) before determining whether a revocable or irrevocable trust is best for your circumstances.
Seward & Seward helps clients of all means – those with modest assets and those with substantial assets – plan their estates and has done so for over 50 years. After carefully discussing your goals and assets with you, we will work with you to craft a customized plan that suits your needs. Please call or email us today to set up an appointment.
