Understanding the difference between two common types of trusts when estate planning
When it comes to strategic estate planning, trusts are on a vital piece of the puzzle. Trusts are oftentimes created to hold assets on behalf of a beneficiary while he or she is still living, to help avoid probate time and costs, and even sidestep certain estate taxes. Ownership of a trust can be transferred anytime within one’s lifetime or after through the direction of a will, at which time the assets from the trust will be dispersed to the named beneficiaries. While the concept of a trust is relatively cut and dry, there are two common types and it’s important to understand the difference.
Key Differentiators Between a Revocable and Irrevocable Trust
Revocable Living Trust
A revocable trust is created during the lifetime of the grantor. It follows suit by holding assets on behalf of another individual and their beneficiaries, but revocable means the trust can be canceled at anytime. The grantor of the trust is also the owner and can choose to remove assets, change beneficiaries, or void the trust completely without seeking permission.
Here are the main attributes that make a revocable trust unique:
- Ownership: The Grantor of a revocable trust has full ownership over the assets within the trust, and maintains ownership of the trust until his or her death.
- Modification: The Grantor preserves the right to modify the terms of the trust, take assets out, rename beneficiaries, and even maintain control of the trust in the case they become incapacitated but are able to refute it.
- Trustee: Typically, the Grantor is also named as the trustee.
- Protection: Since the Grantor does maintain ownership, the assets within the trust will be included in the value of property owned upon death; thus, the trust will be subject to estate tax. In addition, legal claims and claims of creditors on the Grantor can still impact the revocable trust since it is owned by the individual.
Irrevocable Living Trust
An irrevocable trust has the same job as the revocable living trust; however, the irrevocable trust means the grantor cannot make changes to the assets, beneficiaries, or other items named within the trust without special permission. As a tradeoff, protection against taxes on assets within the trust, during the grantor’s lifetime, is much greater since the assets are no longer under the grantor’s name.
Here are some key attributes that sets the irrevocable trust apart from the revocable trust:
- Ownership: The Grantor of an irrevocable trust turns over ownership of the assets allocated to the trust. This means the trust is now the owner of the assets until distributed upon the Grantor’s death.
- Modification: Assets that are entered into the trust cannot be taken out and terms cannot be changed without the beneficiary’s approval. Though, there may be an exception to changing the names of the beneficiaries with a special power of appointment.
- Trustee: An independent person is typically named as the trustee. The trustee is often a separate entity from the Grantor.
- Protection: The appreciated assets in the irrevocable trust will not be encompassed in the value subject to estate taxes, and the assets are protected from claims made by creditors on the Grantor because the assets are now in different ownership. Irrevocable trusts are beneficial for those who have an estate tax value beyond the federal estate tax exemption, $5.45 million for a single individual, which is easier to achieve than one may think.
It is vitally important to understand the difference between a revocable and irrevocable trust when estate planning, since both can have large implications on the future of one’s assets. For more clarification or to get started on setting up a trust, today, contact the estate planning attorneys at Anselmo Lindberg & Associates.