Revocable Trust vs. Irrevocable Trust: An Overview
A revocable trust and living trust are two distinct terms that basically define a similar function: and that is a trust which has terms that can be altered at any time. Whereas an irrevocable trust can be best described as one which you cannot change once it has been created.
If you’re unfamiliar with the subject, a trust should be thought of as a separate legal entity that a person establishes to manage their assets. A trust might be setup to assure that assets will be used in a way that the person setting up the trust feels is appropriate. Once assets have been placed into the trust, another third party, which is known as a trustee, will manage the funds.
A trustee is assigned to ascertain how assets should be invested and who they are distributed to when the owners of the trust passes away, however a trustee must always oversee the trust in accord with the rules laid out when the trust was established. It is typical for an affluent person to use such a trust as opposed to a will for estate planning as well as for stipulating what will happen to that wealth upon his or her death. A trusts can also be a great way to reduce your overall tax burden and increases the probability of avoiding a costly or protracted probate process.
Revocable Trust (Living Trust)
A revocable trust, as you can probably guess – is quite literally the opposite of an irrevocable trust, in that the provisions can be altered or canceled by the grantor. While the trust is active, any income earned will be given to the grantor via distributions, and only after a death would assets then be transferred on to the named beneficiaries. You can always modify a revocable trust with a simple amendment if being having second thoughts about a specific condition in the trust’s terms, so you can change your mind and determine which friends or family members should be name as beneficiaries. You are free to revoke or undo the entire trust as well if you determine that it just isn’t serving its purpose any longer.
An irrevocable trust is exactly what the word describes, which is a trust that can’t be modified, amended, or terminated without the original beneficiary’s permission. After a transfer of assets into the trust occurs, the grantor will then be forbidden from changing the trust agreement, in effect removing all that person’s rights of ownership to any assets listed in the trust documents.
The terms of an irrevocable trust are essentially final the exact minute the agreement is signed. Aside from very rare situations, no changes can be made to an irrevocable trust after creation. Any benefactor, having now transferred their assets into a trust – effectively gives up all rights of ownership to these assets and, along with (almost) all control.
The main reason someone would choose the irrevocable trust route is taxes. Inside an irrevocable trust, assets have been removed from the benefactor’s taxable estate, so they are no longer subject to the estate tax penalty upon death, thus they alleviate the benefactor of tax liability for income which is being generated by or derived from the assets.
Irrevocable trusts can be difficult to set up and most folks require the help of a qualified attorney. Contact our office at 509-328-2150 to get assistance establishing your own revocable or irrevocable living trust.