There are many different types of trusts for estate planning purposes. The most common trust types are revocable and irrevocable trusts, and many people wonder if they need one or both to be protected.
While there are some similar features, these two major categories of trusts carry different purposes in your estate plan. Both can substitute for a last will and testament as an alternative way to distribute property, though a trust and a will often exist concurrently to provide the best protection in case of death or incapacity. Determining if a revocable or irrevocable trust works better for your estate plan depends on what you need the trust to do for you and your family. Everyone’s situation is a little different and consulting with an estate planning attorney can help you decide what’s best for your family.
The Difference Between a Revocable and Irrevocable Trust
The most striking difference between a revocable and irrevocable trust is made clear by the names. A revocable trust permits changes, amendments, and revocations at any time while you are alive and mentally capable of doing so. In contrast, an irrevocable trust does not permit amendments or revocations of any type while you are alive. The only changes allowed by the terms of the trust are updates that the trust agreement itself defines and allows.
Both types of trusts, when properly implemented, can help your family avoid probate. Both a revocable and irrevocable trust will survive your death, and your named successor trustee(s) will be able to distribute trust property without court interference at that time. Remember that the trustee may only distribute assets that the trust owns in title in order to avoid probate. If property has not been deeded to the trust, you still run the risk of dealing with the probate process.
Problems with Probate
Probate is slow and time-consuming, taking anywhere from six months and in many cases one to three years to complete. Although it varies by state, probate can be costly and the fees can be as substantial as ten percent of the estate. Finally, probate is a public process, and all documents and information will become part of the public record. Estate debts and assets become public knowledge, as are the distributions of assets. Anyone who cares to look up the public record can know which beneficiary received what, which can often make targets of inheritors for scams or burglaries.
Revocable Trusts versus Irrevocable Trusts
Both types of trusts help you control property after death and can protect your assets from being disclosed in public record through probate. When thinking about the potential for lawsuits while you’re alive, however, there are some stark differences. For example, with a revocable trust; if you create the trust, control the trust as trustee, and are the trust beneficiary, you will NOT receive protection from creditors or others who may have a legal claim against you. The lack of credit protection in a revocable trust is significantly different from an irrevocable trust.
Revocable Trust
- Permits control of your assets, their distribution, and how they are spent after death
- Bypasses the probate process
- Limits probate if you have properties in multiple states and want to avoid probate in each state
- Useful if you desire to simplify the distribution of your property to your heirs and children when you pass away.
Irrevocable Trust
An irrevocable trust can prevent the distribution of assets to certain entities or people, such as a long-term care facility or a creditor. In order to get that protection, the trust must be setup before that protection is needed. Essentially, the irrevocable trust must be in place and active for a certain period of time in order to provide that protection. In Nevada, the statute of limitations period on irrevocable trusts is typically 2 years. The irrevocable trust creates a legal wall separating you and your assets permitting the shielding from creditors or long-term medical care costs. Asset protection is one of the most useful and powerful aspects of an irrevocable trust, especially for professionals and folks with a lot of assets.
- Permits control of your assets, their distribution, and how they are spent after death
- Byspasses the probate process
- Useful in the following instances:
- You have concerns about future long term medical costs
- You want to preserve generational wealth by protecting your assets from creditors or long-term care facilities
- You want to protect your assets from potential future lawsuits
- You want to limit federal estate taxes on your estate
An irrevocable trust can also be used as a vehicle to shield your multi-million dollar wealth from excessive federal estate taxes to preserve generational wealth. 2022 tax exemptions include:
- $12,060,000 federal estate tax exemption with a 40 percent top federal estate tax rate
- $12,060,000 Generation-Skipping Transfer (GST) tax exemption and a 40 percent top federal GST tax rate
- Lifetime gift tax exemption is $12,060,000 and a 40 percent top federal gift tax rate
- An annual gift tax exclusion amount increase to $16,000
Create Your Trust Today
Both revocable and irrevocable trusts can provide estate planning benefits depending on your needs. To best protect your interests and those of your beneficiaries, meet with a qualified estate planning attorney from Michaelson Law to learn more about the type of trust(s) that best fit your needs.
