Both revocable and irrevocable trusts are used in estate planning, but they serve different purposes and offer different advantages and disadvantages. A revocable trust allows the person who sets up the trust (the grantor) to change or revoke the trust at any time during their lifetime. At the time of your death, a revocable trust becomes irrevocable for obvious reasons. An irrevocable trust on the other hand, cannot be changed or revoked once it is established. Each has their own respective pros and cons, below are details of a few of each for both revocable and irrevocable trusts.
Pros of Revocable Trusts (Living Trusts)
Flexibility: The first benefit of a revocable trust is the flexibility it comes with. When a revocable trust is set up, the grantor is able to make changes as needed, or discard the trust altogether. This type of trust accounts for the life changes that may occur and allows a grantor to reflect that in their trust documents.
Control: Assets are important to an individual, which is why one would set up a trust in the first place. With a revocable trust, the grantor acts as the trustee during their lifetime. They are the primary person in control of all of the assets within the trust.
Cons of Revocable Trusts
No Asset Protection: Generally, revocable trusts do not offer protection from creditors or lawsuits since (while living) the grantor still essentially owns all of the assets.
Tax Implications: Assets held in a revocable trust are included in the grantor’s taxable estate and will be subject to estate taxes.
Pros of Irrevocable Trusts
Asset Protection: Assets held in irrevocable trusts are typically shielded from creditors or disputes against the grantor. Irrevocable Trusts are commonly utilized in Medicaid planning as well.
Tax Benefits: Generally, assets in an irrevocable trust will not be included in the grantor’s taxable estate at the time of their death. This could potentially reduce estate taxes.
Cons of Irrevocable Trusts
Limited Flexibility: Once irrevocable trusts are established, it is difficult to change or cancel without court approval or beneficiary consent. They are inflexible in that way.
Loss of Control: Similar to the lack of flexibility, grantors also relinquish control over their assets once they are placed in this type of trust.
If you have any questions about whether a trust is right for you, please contact Ward, Shindle & Hall.
