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Revocable versus irrevocable trusts

On Behalf of | Apr 23, 2024 | Estate Planning

Creating a trust is an excellent way to transfer assets, avoid probate and build generational wealth. Trusts are a valuable tool when creating an estate plan.

While there are trusts created for specific purposes, such as special needs or charitable trusts, they can usually be divided into two categories: revocable and irrevocable. Each type has pros and cons, and understanding the differences can help you decide your best option.

Revocable trusts

A revocable trust is characterized by its flexibility. It allows you (the grantor) to retain control over the assets. This means you can alter, amend or even revoke the trust anytime during your lifetime. The adaptability offered by a revocable trust makes it an attractive option, as it allows for adjustments in response to life changes, including relationships, finances or personal objectives.

In addition to the control and accessibility offered by a revocable trust, it bypasses the probate process, allowing a smoother and quicker transfer of assets to the beneficiaries. Avoiding probate through a trust also protects privacy, unlike a will that becomes a public record.

The drawback of a revocable trust is that it offers no protection from creditors during your lifetime. Furthermore, the assets in the trust are still considered part of the estate and will be used to determine any estate taxes.

Irrevocable trusts

Once you establish an irrevocable trust, it cannot be easily changed or revoked. While this permanence may seem daunting, it does come with significant advantages, such as:

  • Protecting assets from creditors and legal judgments against the grantor
  • Reducing estate taxes, saving significant money for large estates subject to estate taxes.
  • It helps meet the eligibility requirements for certain government benefits, such as Medicaid (as long as it’s done before the 5-year look-back period).

However, the major drawback of an irrevocable trust is the loss of control over the assets placed within the trust. Once transferred, the grantor cannot reclaim these assets or make changes to the trust’s terms without the approval of the trust’s beneficiary.

Choosing between a revocable and irrevocable trust depends on your specific circumstances. Due to the complexities of establishing trusts, it is best to review your options with someone who can help you make an informed decision.