Revocable vs Irrevocable Trust: What Type of Trust Should You Consider?

Trusts can be powerful tools for estate planning and asset protection, providing individuals and families with greater control over their wealth and the ability to ensure its smooth transition to future generations. However, with numerous types of trusts available, it’s crucial to understand their unique characteristics and how they align with your specific goals and circumstances.

What is a Revocable Trust? 

A revocable trust, also known as a living trust or inter vivos trust, is a legal arrangement that allows individuals to place their assets and properties into a trust during their lifetime. The person creating the trust, known as the grantor or settlor, retains control over the assets and can make changes to the trust or revoke it entirely if desired.

One of the primary purposes of a revocable trust is to facilitate the seamless management and distribution of assets upon the grantor’s incapacity or death. By placing assets into the trust, the grantor transfers legal ownership to the trust itself. The trust is managed by a trustee, who can be the grantor or another individual or entity appointed by the grantor.

Examples of Assets that Can Be Placed in a Living Trust

A living trust provides a versatile means of holding various types of assets. 

Here are some examples of assets that can typically be placed in a living trust:

• Real Estate
• Financial Accounts
• Personal Property
• Business Interests
• Intellectual Property
• Life Insurance Policies

Not all assets need to be placed in a living trust. Assets with named beneficiaries or joint ownership may pass directly to the designated individuals upon the grantor’s death, bypassing the trust. Consulting with a local accountant who has experience creating living trusts can help you determine which assets are appropriate for inclusion in your living trust based on your specific circumstances. 

What Assets Should Not Be in a Revocable Trust? 

While a revocable or living trust can be a valuable tool for managing and distributing assets, not all assets should be placed within a trust. 

Here are some examples of assets that are typically not recommended for inclusion in a living trust:

• Retirement accounts
• Health Savings Accounts (HSAs)
• Motor vehicles
• Personal belongings and household items
• Jointly owned property

It’s important to consult with an accounting firm, such as Steward, Ingram, & Cooper, PLLC to determine the best approach for managing your specific assets and estate plan. We are happy to guide you to identify the assets that should or should not be included in your living trust to ensure you have an efficient and effective estate planning strategy.

Advantages of a Revocable Trust

Creating a living trust offers several advantages, providing individuals and families with a versatile tool for estate planning and asset management. 

Here are some key advantages of establishing a living trust:

Probate Avoidance

One of the primary benefits of a living trust is the ability to bypass probate. Upon the grantor’s passing, assets held in the trust can be distributed to beneficiaries without the need for court involvement, which can save you time and money while maintaining your privacy.

Privacy

Unlike a will, which becomes a matter of public record during probate, a living trust allows for the confidential transfer of assets. The details of the trust and its distribution remain private and are not subject to public scrutiny.

Incapacity Planning

A revocable trust provides a mechanism for managing assets in the event of the grantor’s incapacity. If the grantor becomes unable to handle their financial affairs, a successor trustee can step in and manage the trust assets as per the grantor’s instructions, avoiding the need for a court-appointed conservatorship.

Smooth Asset Management

By consolidating assets within a living trust, it becomes easier to manage and track them. The grantor can provide detailed instructions on how the assets should be managed and distributed, ensuring a smooth transition and administration.

Potential Tax Planning

While a living trust does not provide direct tax advantages, it can be used as part of an overall tax planning strategy. Assets held within the trust can be structured to minimize estate taxes, preserve wealth, and take advantage of tax-saving opportunities.

Asset Protection

Depending on the jurisdiction, a revocable trust may offer some level of asset protection from creditors or legal claims. Placing assets in a trust separates them from personal ownership, potentially safeguarding them in the event of financial difficulties or litigation.

Continuity of Ownership

A living trust can provide a seamless transfer of assets to beneficiaries upon the grantor’s passing. This can help avoid delays and disputes, ensuring that the intended beneficiaries receive their inheritance in a timely and organized manner.

What is an Irrevocable Trust? 

An irrevocable trust is a type of trust in which the grantor transfers assets to the trust, relinquishing ownership and control over those assets. Unlike a revocable trust, an irrevocable trust cannot be modified, amended, or revoked by the grantor without the consent of the beneficiaries or a court order.

Why Choose an Irrevocable Trust? 

There are several reasons why individuals may choose to establish an irrevocable trust:

Estate Tax Planning

Transferring assets to an irrevocable trust removes them from the grantor’s taxable estate, potentially reducing estate tax liabilities. By placing assets in an irrevocable trust, the grantor ensures that future appreciation and income generated by those assets will also be outside the taxable estate.

Asset Protection

Assets placed in an irrevocable trust are shielded from creditors and legal claims. This protection can be particularly beneficial in situations involving high-risk professions, potential lawsuits, or preserving assets for future generations.

Medicaid Planning

Irrevocable trusts can be used as part of Medicaid planning to help individuals qualify for government assistance while preserving certain assets. By transferring assets to an irrevocable trust within specific timeframes, individuals can potentially meet the eligibility criteria for Medicaid benefits.

Charitable Giving

Irrevocable trusts can be established for charitable contributions, such as creating a charitable foundation or providing ongoing support to charitable organizations. These trusts offer tax advantages and allow individuals to leave a lasting philanthropic legacy.

Assets Commonly Placed in an Irrevocable Trust 

Some of the assets that are commonly placed in irrevocable trusts may include: 

• Real estate
• Life insurance policies
• Investment accounts
• Business interests
• Cash and financial assets

We strongly recommend consulting with a financial planner who can ensure you understand the implications of establishing an irrevocable trust. In addition, a financial planner can provide guidance tailored to your specific circumstances and help determine the most appropriate assets to include in your revocable vs irrevocable trust.

The Key Differences Between a Revocable vs Irrevocable Trust Explained

In navigating the world of trusts, understanding the key differences between a revocable vs irrevocable trust is essential. While both types serve distinct purposes, they offer different levels of control, flexibility, asset protection, and tax implications. 

Join us as we delve into the contrasting features of revocable vs irrevocable trusts, providing you with valuable insights to guide your trust-planning journey.

Features of Revocable Trusts or Living Trusts

Let’s take a closer look at the important features of revocable trusts: 

Control and Flexibility

In a revocable trust, the grantor retains control over the assets and can make changes to the trust terms or revoke the trust entirely at any time during their lifetime. The grantor can add or remove assets, change beneficiaries, or amend the terms of the trust as needed.

Probate Avoidance

One of the primary advantages of a revocable trust is the ability to avoid probate. Upon the grantor’s death, the assets held in the revocable trust can be distributed directly to the beneficiaries named in the trust document, bypassing the probate process.

Incapacity Planning

A revocable trust provides a mechanism for managing assets in the event of the grantor’s incapacity. If the grantor becomes unable to manage their affairs, a successor trustee can step in and handle the trust assets according to the grantor’s instructions.

Tax Treatment

Revocable trusts do not provide any significant tax advantages. The trust’s income is typically taxed to the grantor, and the assets in the trust are included in the grantor’s taxable estate for estate tax purposes.

Features of Irrevocable Trusts

Let’s explore the significant features of irrevocable trusts: 

Loss of Control

Once assets are transferred to an irrevocable trust, the grantor relinquishes ownership and control over them. The grantor cannot make changes to the trust terms or revoke the trust without the consent of the beneficiaries or a court order.

Asset Protection

Irrevocable trusts provide a higher level of asset protection compared to revocable trusts. Once assets are placed in an irrevocable trust, they are shielded from creditors and legal claims.

Estate Tax Planning

One significant advantage of an irrevocable trust is the potential reduction of estate tax liabilities. Assets transferred to an irrevocable trust are typically removed from the grantor’s taxable estate, which can result in estate tax savings.

Medicaid Planning

Irrevocable trusts can be used as part of Medicaid planning to help individuals qualify for government assistance while preserving certain assets. By transferring assets to an irrevocable trust within specific timeframes, individuals can potentially meet the eligibility criteria for Medicaid benefits.

Tax Treatment

Irrevocable trusts may offer tax advantages, such as the ability to shift income and appreciation to beneficiaries, potentially reducing the grantor’s tax burden. However, irrevocable trusts have their own tax rules and considerations that should be evaluated with the assistance of a qualified tax professional.

What is the Best Type of Trust to Protect Assets?

While a revocable living trust does not provide direct asset protection, it does offer several benefits. It allows you to maintain control over your assets during your lifetime and enables the seamless transfer of assets upon your death, avoiding probate. An irrevocable trust, on the other hand, is a popular choice for asset protection. Once assets are transferred into an irrevocable trust, they are no longer considered part of your estate and are protected from creditors, lawsuits, or other potential risks. However, it’s important to note that the transfer is permanent, and you relinquish control over the assets.

It is important to consult with an experienced estate planning financial advisor who can assess your individual circumstances and provide tailored advice based on your goals and the legal and financial landscape of your jurisdiction. Laws can vary significantly from state to state, so it’s essential to seek professional guidance to ensure compliance and effectiveness of your asset protection strategy in order to choose the best type of trust for your specific needs. 

How To Set Up a Revocable Trust 

Here’s an easy-to-follow, 10-step, general overview of the process of setting up a revocable trust:

#1 – Determine if a Living Trust is Right for You

Consider your goals, assets, and estate planning needs. Assess whether a living trust aligns with your objectives, such as avoiding probate, providing for incapacity, or maintaining privacy.

#2- Choose a Trustee

Select a trustworthy and capable individual, such as yourself or a reliable family member, to act as the initial trustee. Alternatively, you may opt for a professional trustee, such as a bank or a trust company. The trustee will be responsible for managing the trust assets according to your instructions.

#3 – Identify and List Trust Assets

Compile a comprehensive list of assets you intend to transfer to the living trust. This may include real estate, financial accounts, personal property, and other valuable possessions. Determine how each asset should be titled in the trust’s name.

#4 – Consult with an Estate Planning CPA

Engage the services of an experienced estate planning CPA who specializes in living trusts. They will guide you through the legal requirements, tailor the trust document to your specific needs, and ensure compliance with relevant state laws.

#5 – Draft the Trust Document

Work with your CPA to create the trust document, also known as the trust agreement or declaration of trust. This document outlines the terms, instructions, and provisions of the trust, such as asset management, distribution of assets, and the appointment of successor trustees or beneficiaries.

#6 – Fund the Trust

Transfer ownership of the identified assets to the living trust. This typically involves retitling assets, such as real estate and financial accounts, in the name of the trust. Work with your attorney and financial institutions to ensure proper documentation for the transfer of assets.

#7 – Sign and Execute the Trust Document

Sign the trust document in the presence of a notary public, following the legal requirements of your jurisdiction. Depending on local laws, witnesses may also be required.

#8 – Notify Relevant Parties

Inform financial institutions, such as banks and investment firms, about the existence of the living trust and provide them with copies of the necessary documentation. Update beneficiary designations as appropriate.

#9 – Maintain the Trust

As the grantor and initial trustee, you retain control over the living trust during your lifetime. Monitor and manage the trust assets, making any necessary changes or updates as circumstances evolve.

#10 – Review and Update

Regularly review and update your living trust to ensure it reflects your current wishes, accounts for changes in your assets, and accommodates any life events, such as births, deaths, or divorces. Consulting with your attorney periodically can help ensure the trust remains aligned with your goals.

Contact Our Raleigh CPA Firm for Assistance Setting Up a Living Trust

If you are a small business owner looking for help setting up a living trust in or around Raleigh, our Raleigh CPA firm is here to help. Steward, Ingram, & Cooper, PLLC has over 20 years of experience creating trusts and we are dedicated to ensuring the security of local business owners’ assets for years to come. 

Call us today at  (919) 872-0866 or fill out the form below to schedule a consultation with our Raleigh CPA firm.