Revocable Trusts vs. Irrevocable Trusts
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 $11,200,000), 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.
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December 28, 2009
What is “probate”? Probate is basically the process of proving before the appropriate court that a document identified as a last will and testament is genuine. The advocate of the will, often the “executor” appointed in the will itself, presents the original of the will to the Clerk of the Circuit Court located in the city or county where the decedent lived at the time of death. The Clerk then reviews the document to confirm that it meets the requirements under Virginia law for a validly executed and properly proven will. If so, the will is received for recordation by the clerk.
How much does it cost? When you probate a will, you will be asked to estimate the value of the estate assets, including real and personal property, located in Virginia when the decedent died. For estates over $15,000, the Clerk will collect a probate tax based on a rate of 10 cents for every $100 of value. Some courts also charge an amount equal to 1/3 of the applicable probate tax. So, if the decedent’s estate had an estimated value of $500,000, the Virginia probate tax would be $485.00, plus 161.66 if the locality charges an additional 1/3.
How long does probate take? This question does not lend itself to a “one size fits all” answer. The length of time probate will take depends on, among other things, the size and complexity of the estate, the Circuit Court handling the matter, and the efficiency of the executor. As for certain “hard” deadlines, the executor must file an inventory of assets with the “Commissioner of Accounts” within four months from the date on which they qualified as executor. An accounting (basically a detailed check register) must be filed within sixteen months from the qualification date. Basically, probate takes as long as it takes the executor to wind up the estate, identifying and paying just debts and distributing the remaining assets among the beneficiaries as spelled out in the will. The real point of the inventory and accounting process is to protect the beneficiaries. The Commissioner of Accounts only job is to ensure that the executor is properly doing his or her job, holding that person accountable for properly disposing of property to appropriate beneficiaries as the testator requested.
So, all in all, probate in Virginia is designed to facilitate the orderly winding up of a decedent’s estate. The process ensures that the executor carries out his or her responsibilities, and it also serves to protect beneficiaries from executor’s mistakes or, in rare instances, fraud. With a tax rate of 10 cents for every $100 over $15,000, only a small fraction of the estate goes to the court in the form of a probate tax, leaving almost all of the estate, after payment of just debts, to the beneficiaries.