- A revocable trust is a trust where the money stays liquid; it can be taken out again. An irrevocable trust is a trust where the money cannot be taken out again.
- A revocable trust often becomes irrevocable after the death or incompetency of the person who sets up the trust, making it a good option for elderly people looking to set up a trust they can still access during their lifetime but will become inaccessible once they die or become mentally incapacitated.
- Many people choose to use an irrevocable trust because it provides greater asset protection, meaning creditors, nursing homes, and other parties cannot access the assets.
Revocable vs. Irrevocable Trusts
The difference between a revocable and irrevocable trust is simply stated: When you put money into a revocable trust, you can take it out again. When you put money into an irrevocable trust, however, that money becomes inaccessible: in other words, you can’t take it out again.
Obviously, there’s a different chain of reasoning behind choosing either trust and making the wrong decision about which type of trust to choose can have disastrous consequences. Here’s some more information about revocable and irrevocable trusts to help you decide which type is right for you or for your client.
A revocable trust is an agreement that can be modified at any time. When you put your money into the trust, you do so with the understanding that you can change its terms if you decide the trust isn’t working out like you wanted it to. This means you can change the beneficiaries or trustees, alter a certain provision of the agreement, take out or put in funds, or even cancel the whole arrangement.
A revocable trust often becomes irrevocable after the death or incompetency of the person who sets up the trust. This makes it a good option for elderly people who are looking to set up a trust they can still access during their lifetime but ensure that it will become inaccessible once they die or become mentally incapacitated.
With a little planning, you can also make it possible for your disability trustee to manage the trust in the event of your becoming incapacitated. This protects your money from abuse by a legal guardian or conservator.
Another benefit of a revocable trust is privacy and the avoidance of probate. After the owner’s death, a revocable trust becomes the property of the trust’s beneficiaries, and the transition is kept private and handled outside of the court system.
There are some disadvantages to a revocable trust, however. For one thing, money in a revocable trust still counts toward capital gains and estate taxes, as the money is considered the property of the person who sets up the trust. Also, the money in a revocable trust isn’t completely secure; unlike the money in an irrevocable trust, it can be taken out at any time. For greater asset protection and to avoid further taxation, consider an irrevocable trust.
Assets in an irrevocable trust don’t count toward an estate tax, as anything in an irrevocable trust is no longer considered the property of the person who put it in. This means you’ll get out of paying death taxes on any property you’ve placed in an irrevocable trust. Similarly, placing money in an irrevocable trust can exempt you from paying capital gains taxes on that property.
Besides avoiding taxes, many people choose to use an irrevocable trust because it provides greater asset protection. Obviously, if you can’t get your money out of the trust, neither can anyone else. This added safety measure keeps your property out of the hands of creditors, nursing homes, and other parties, and protects it from lawsuits.
An irrevocable trust also works well for charitable giving purposes, since you can take a charitable income tax deduction for money you put into an irrevocable trust during your lifetime.
Since irrevocable trusts are inaccessible to everyone but the trust’s beneficiaries, they’re a sure way to provide financial support to family members who survive the maker of the trust, such as a spouse or children.
Which Trust is the Best Option for Me?
So which option is best for you or your client? It all depends on the individual. If taxes aren’t a concern, and/or if you could potentially become mentally incompetent at some point in the future, then a revocable trust is probably your best bet.
On the other hand, if you’re concerned about taxes and/or want to set up a secure fund for the benefit of surviving family members, an irrevocable trust may be a good idea. When in doubt about deciding which trust is best for you, contact an experienced and trusted probate attorney today.