Revocable or irrevocable? That is the question.
In addition to a will, many individuals consider using a trust in their estate plan.
There are two types of trusts: revocable and irrevocable.
They mean just what they say: one trust you can revoke at a later time and the other trust is in place indefinitely and cannot be revoked. Both types of trusts allow the property to be distributed without having to use the probate process. Which one is right for you?
Consider these three differences and then we can talk in more depth about what works best for your situation:
Protecting your assets.
If you have a lot of creditors or might in the future, then you may want to consider an irrevocable trust. In a revocable trust, the grantor (or the person who creates the trust) retains ownership of all the property. If there are creditors or lawsuits against that individual, then those creditors may be able to obtain property in the trust. An irrevocable trust, however, involves the grantor giving the property to the trust and losing legal ownership of that property. An independent trustee will then decide how to manage the property in the trust for the benefit of the beneficiaries. Because of that, the grantor does not technically own the property, though they may still enjoy the benefits of it. Additionally, creditors of the grantor cannot take that property.
With an irrevocable trust, you can use various strategies to move assets to the trust and avoid having to pay capital gains taxes. With a revocable trust, you can’t avoid those capital gains taxes. Similarly, because the grantor retains ownership of property in a revocable trust, that property is subject to estate taxes. Property in an irrevocable trust is not subject to estate taxes. If taxes are a major issue, then an irrevocable trust may be more beneficial.
If you have an interest in charitable giving, then you may consider putting assets into a charitable trust. Charitable trusts are irrevocable and also come with tax benefits. The tax benefits depend on when the assets are transferred to the trust. If the grantor moves assets to the trust while still alive, then the grantor receives the income tax deduction on those assets. However, if the assets are not transferred until after the grantor’s death, then it is the estate that receives the deduction.
Both revocable and irrevocable trusts have benefits. These are only a few of the differences between the two.
If you have questions on which type of trust might be best for you, call Rod at (858) 792-3444 or email your interest in learning more.