One of the most common questions we receive in our estate planning practice is, “What is the difference between a revocable trust and an irrevocable trust?” In this blog, we will provide a brief overview of the key differences between these types of trusts and give a few examples on why estate planners use them.
A revocable trust is often also referred to as a “living trust.” Estate planning lawyers use revocable living trusts to avoid court supervised probate, which often allows for the efficient and expedient distribution of a decedent’s property. As its name implies, a revocable living trust is easy to amend or revoke. Indeed, for all intents and purposes, assets owned by revocable living trust are handled much in the same way as assets owned by an individual. For example, while the creator of the trust is still alive, these types of trusts do not file their own tax returns because income flows directly to the person who created the trust, often called the “grantor.”
On the other hand, an irrevocable trust is often used by estate planning attorneys to allow clients to either remove assets from the client’s estate for estate tax purposes, or to provide added asset protection features. The primary concept behind an irrevocable trust is the fact that the person who set up a trust no longer has ownership and control over the assets placed inside the trust. Because such a trust may only be changed under very limited circumstances, the person who created the trust may avoid or mitigate estate taxes otherwise due on those assets when he or she dies. With the proper planning, a client may also be able to use an irrevocable asset protection trust to exempt trust assets from a tort creditor or in a bankruptcy proceeding.
Although irrevocable trusts have somewhat limited application these days due to the high estate tax exclusion (currently, estate taxes only hit individuals with more than $5,500,000), we do use these trusts for asset protection purposes. Conversely, we use revocable living trusts in our practice quite a bit to allow clients to avoid the probate process. You may read more about the probate process in our “what is probate” blog here on our website.
Thanks for taking the time to read this. Let us know if there’s anything we can do to assist you with your planning. Email: firstname.lastname@example.org or call at 804-658-3873.