Revocable Vs Irrevocable Trusts: Key Differences You Need To Know

The value of estates and inheritances is rising in the United States. According to Senior Living, American retirees are expected to transfer over $36 million in wealth to beneficiaries over the next three decades. Retirees who anticipate incorporating the formation of one or more trusts into their estate plans may have questions about the two basic types of trusts: revocable vs. irrevocable trusts. A trust is a separate legal entity that someone sets up to hold their assets. A revocable trust refers to a trust in which the terms may be changed. An irrevocable trust refers to a trust that may not be changed without the consent of the beneficiaries. If you have questions about estate planning and setting up trusts, it may be helpful to speak with the experienced estate planning attorneys at Fleurinord Law, PLLC through our offices in Houston, Texas and Miami, Florida. Consider reaching out to us for a complimentary consultation at (888) 904-2297.

What Should You Consider When Choosing Between Revocable and Irrevocable Trusts?

When deciding on revocable vs. irrevocable trusts, it is important to consider the advantages and disadvantages of each type of trust and what might be most applicable to your needs. Understanding the core concepts involved in trust formation can help individuals preparing their estate plans to make wise decisions.

Understanding Trusts

While many people assume trust funds are only for the ultra-wealthy, they are often a useful tool for middle-class Americans, as well. Trusts assume ownership over assets such as real estate, bank accounts, life insurance policies, valuable jewelry, vehicles, and other assets. The trust also stipulates what will happen to these assets after the person who created the trust passes away.

The person who creates the trust and deposits assets in the trust is known as the grantor. Any person or organization who receives assets from the trust is referred to as a beneficiary. The person or organization tasked with overseeing the trust is known as the trustee. The trustee is responsible for distributing assets in accordance with the trust documents as well as handling taxes related to the trust. In some situations, the grantor and the trustee might be the same person.

Deciding Between Revocable vs. Irrevocable Trusts

When choosing between a revocable vs. irrevocable trust, you may want to ask yourself the following questions:

• Will I want to modify the trust or perhaps even revoke it at some point?
• How do I want my assets to be protected? Do I want to retain ownership of these assets while I am alive, or am I willing to give up ownership of these assets?
• How much am I willing to pay in federal or state estate taxes?

Some individuals may find it helpful to discuss these questions with an experienced estate planning lawyer, such as the ones at Fleurinord Law, PLLC. An attorney who specializes in estate planning law and trust administration can often provide practical guidance regarding the most advantageous trust arrangements for your particular circumstances and estate planning goals.

What Are the Reasons You Should Have an Irrevocable Trust?

According to The Tax Foundation, Americans paid over $18.4 billion in estate taxes in 2021. One of the biggest advantages of irrevocable trusts is that they minimize the burden of estate taxes. When considering the benefits of revocable vs. irrevocable trusts, some of the reasons you may find an irrevocable trust advantageous could include:

• The value of your assets is higher than the federal estate tax exemption and you wish to avoid estate taxes.
• Irrevocable trusts protect assets from lawsuits since those assets are no longer available to the grantor. This can be especially advantageous for people who are more likely to face lawsuits, such as surgeons or architects.
• Your assets could make beneficiaries ineligible for certain government programs, such as Medicaid or Supplemental Security Income. Placing assets in an irrevocable trust may keep beneficiaries eligible for government programs as the trust funds are not included in their own assets and income.

What Are the Downsides of an Irrevocable Trust?

While the potential tax benefits often provide a compelling argument in favor of choosing an irrevocable trust structure, it is also important to consider the disadvantages of irrevocable trusts when comparing revocable vs. irrevocable trusts. Some of the disadvantages include:

• The grantor loses control of all assets in an irrevocable trust. They no longer have ownership over the assets.
• The terms of an irrevocable trust cannot be modified. If the grantor changes their mind about the terms, or the trustee, or the beneficiary, it is not possible to make changes or remove any of those people.
• Irrevocable trusts can be complicated and difficult for non-experts to understand and set up.

In general, irrevocable trusts are often most advantageous for high net-worth individuals, especially as one of the greatest advantages to irrevocable trusts is the reduction of estate taxes, which primarily impacts high net-worth people.

What Are the Disadvantages of a Revocable Trust?

Sometimes individuals are drawn to the idea of a revocable trust because of the flexibility that structure allows. A revocable trust may seem more advantageous because the grantor maintains control of the assets and can modify the trust at any time. However, revocable trusts, too, have some disadvantages. These include:

• Assets are not protected from creditors, as they would be in an irrevocable trust. This means that if the grantor is sued, a court can order that the assets in the trust be liquidated.
• Once the grantor passes away, the assets will be subject to state and federal estate taxes as the estate makes its way through the probate process.
• Even with a revocable trust, the grantor will still need to create a Last Will and Testament and an overall estate plan.
• Creating a revocable trust can be expensive because it requires a lot of work. All assets that are transferred to the trust must be re-titled, so a revocable trust does not offer significant savings over an irrevocable trust in the process of formation.

How an Estate Planning Lawyer May Be Able To Help

The appropriateness of revocable vs. irrevocable trusts is contextual to each person’s situation. Depending on the person’s financial needs and priorities, one type of trust may be more suitable for them than another. As you consider your options for trust formation, it may be helpful to speak with an experienced estate planning lawyer to determine what the best path for you is when making critical decisions about trusts. At Fleurinord Law PLLC, we work closely with our clients to help them create an estate plan that meets their needs. Consider reaching out to us today for a consultation at (888) 904-2297.