A trust is a useful tool for holding assets you plan to pass on to your beneficiaries. There are many kinds of trusts to suit the many reasons people form them, including revocable and irrevocable. An Orange County estate planning attorney can help you decide which one best fits your needs.
Put simply, irrevocable trusts cannot be altered in any way, and revocable trusts can be changed over the years. In this article, we’ll explore the differences between these categories in detail.
What Is a Revocable Trust?
A revocable trust is a trust that can be altered or revoked at any time. This gives you more flexibility when it comes to the terms of the trust, and its contents. It operates in a similar manner to a will.
Here are some common changes people make to revocable trusts:
- Change the terms and set new specifications
- Add or remove people
- Add or remove assets
- Revoke the will completely
Why would you want to change your trust? Most experts suggest reviewing and changing your estate planning documents every few years. When your family life, financial status, or marital status changes—you may want to adjust your trust accordingly.
If you need to change the trust a great deal, you may choose to revoke it instead, so that it no longer exists. That gives you the opportunity to create a new one.
For example, after a divorce or marriage, you’ll want to update your beneficiaries. You can add new assets you may acquire, or remove them.
What Is an Irrevocable Trust?
An irrevocable trust is one that cannot be altered after it is signed. That means that assets contained in one of these trusts will no longer be under your control. Instead, they will be considered property of the trust.
The loss of control over your assets can be daunting, which is why some people opt for a revocable trust instead. However, this type of trust has tax benefits and can be very useful for estate planning— one that you may still be able to avoid.
Putting assets in one of these trusts allows your beneficiaries to skip the estate tax, and also lets them keep your assets instead of them being used to paying off any of your leftover debts.
A revocable trust and irrevocable trust serve two different functions. Both of these hold assets and make them easier to pass on to your beneficiaries.
A revocable trust is meant to distribute assets among beneficiaries, and the grantor can make significant changes to the trust. You can change the beneficiaries, terms of the trust, and items contained within. It provides privacy, just like any other trust, so your assets won’t be made public after your death.
However, it doesn’t have the tax benefits associated with other trusts. There are also limits to the assets you can include in a revocable trust—they exclude retirement accounts. Revocable trusts also have a long window during which they can be contested, much longer than the 3-month maximum for other trusts.
Irrevocable trusts, on the other hand, can’t be changed and requires you to relinquish control over your assets. They can have serious financial advantages, though. You won’t be taxed on assets in an irrevocable trust, and they won’t be subject to an estate tax after you die, either.
These trusts also protect your assets from creditors, making them a potential choice for people with debt. For example, if you die with debt, or are facing medical debt, your assets will be safe in an irrevocable trust, because they are owned by the trust instead of you personally.
Who Should Use An Irrevocable Trust?
Irrevocable trusts are inflexible, but serve an important purpose in many estate plans.
The key benefit of irrevocable trusts is that they allow you to transfer ownership of assets to a trustee. This can have financial benefits, and let you avoid taxes on some of your property.
This type of trust transfers ownership of assets to your trustee, but you may still be able to benefit from those assets financially.
If you have debt or suspect you may be sued, an irrevocable trust can be a good way to keep important assets safe, like your home or large amounts of cash.
Who Should Use A Revocable Trust?
Revocable trusts aren’t for everybody, but they can be hugely beneficial in some situations.
A revocable trust allows your beneficiaries to skip probate court, a process that can take a lot of time and money.
The assets contained in a revocable trust are immediately available to the beneficiaries, so they can pay for funeral costs and settle your affairs. They allow you to distribute your property clearly and easily.
However, revocable trusts don’t have the same tax advantages as irrevocable trusts. You can contact an estate planning lawyer Orange County for more information on the tax situation for each kind of trust.
What Can Trust Funds Hold?
A trust can hold any number of assets, from personal property to real estate to stock portfolios.
There are a few assets that generally shouldn’t go into a revocable trust, however. Retirement accounts, health savings accounts, and life insurance are some examples of assets that simply don’t make sense to transfer into a trust.
There’s no limit to how much trust can hold, but remember that these assets won’t be under your control. However, if you transfer over a certain amount into a trust in one year, you may trigger a gift tax.
A probate attorney Orange County can provide detailed insight into the best way to hold your assets, and which ones would fare best in which type of trust. The answer to that question often depends on your unique finances.
An irrevocable fund provides tax savings and certain protections for your assets, but cannot be changed. By contrast, a revocable fund can be changed, but it doesn’t offer the same tax benefits.
Either one of these could have a place in your estate planning, and in fact, many people have both types of trust funds in their estates.
If you are planning your estate and making important decisions about your assets, consider getting an opinion from a probate attorney.
Good legal advice can improve your estate plan and keep your assets safe for your beneficiaries, contact us at McKenzie Legal & Financial today.