Revocable vs. Irrevocable Trusts: What’s the Difference?
When creating an estate plan, one of the biggest decisions you might encounter is whether to use a revocable or irrevocable trust. What is the difference between the two and when is one more appropriate than the other?
Revocable and irrevocable trusts are two common estate planning tools, but they have some key differences. A revocable trust offers flexibility since you can modify it at any time. An irrevocable trust can provide tax advantages and asset protection since its terms can’t be changed once it’s set up. There are pros and cons to each type of trust. To discuss your estate plans in Florida or Minnesota, consider contacting an experienced estate planning attorney at Roulet Law Firm, P.A., by calling our Venice, Florida office at (941) 909-4644 or our Minnetonka, Minnesota office at (763) 420-5087 to schedule a consultation.
Flexibility and Control with Revocable Trusts
As the name suggests, revocable trusts can be revoked, amended and changed by you throughout your lifetime. Given their flexible nature, revocable trusts are easy to update as your life circumstances evolve — be it marriage, a new child, or even sudden financial changes.
Revocable Trusts Can Avoid Probate
One of the main benefits of a revocable trust is that it avoids probate, the court-supervised process for distributing assets after someone dies. With a revocable trust, your designated successor trustees can step in to manage assets according to your wishes without court oversight. That means your family not only saves the time and expense of court involvement, but they also have much quicker access to your assets in the event something were to happen to you as they do not have to wait on the court.
Revocable Trusts Keep Your Affairs Private
Revocable trusts also provide privacy, since the trust terms and asset distribution details don’t become public record through probate. This helps protect your family from prying eyes and third-parties who may be looking to “help them spend their inheritance”.
Tax Savings and Asset Protection with Irrevocable Trusts
As the name suggests, irrevocable trusts generally cannot be changed by you after they are created. So you may be wondering why you would want to lock yourself into an irrevocable trust. Well, there are numerous advantages.
Tax Savings Using an Irrevocable Trust
While irrevocable trusts generally don’t allow modifications, they can provide estate tax planning advantages. Assets transferred to a properly structured irrevocable trust may be removed from your taxable estate helping you to minimize, or even avoid, state and/or federal estate taxes at your passing.
Creditor Protection
Assets placed in an irrevocable trust are shielded from creditor claims and lawsuits. Therefore, using the right type of irrevocable trust can provide robust asset protection for you from potential creditors.
Protecting Assets for a Surviving Spouse
There are many reasons why you may not want to leave assets outright to your surviving spouse. For example, your spouse could remarry and have the assets end up being left to their new spouse and family. Your spouse could get sued. By leaving assets in an irrevocable trust for the benefit of your surviving spouse, you can provide for them, while ensuring the assets you leave behind are protected.
Planning for a Vacation Home or Heirloom Property
Irrevocable trusts are commonly used to hold heirlooms intended for particular beneficiaries. If you own a lake home, cabin, family farm, beach house or other heirloom property, an irrevocable trust may be the right choice for you. By placing the property into a properly prepared trust, you can ensure the property passes only to people you intend.
This can be especially useful if you inherited the property. For example, I often ask clients how they would feel if the farm or lake home they inherited from their parents or grandparents ended up going to someone outside their immediate family as a result of a divorce or other event. Proper planning can ensure that does not happen.
Protecting Your Home and Retirement Nest Egg from Nursing Home and Long-Term Care Costs
Revocable trusts do not protect your home and savings from long-term care and nursing home costs. However, a family asset protection trust, a special type of irrevocable trust can also be used to protect your assets from these expenses.
So when should you choose each type of trust.
Consider revocable trusts if:
- You want to retain flexibility and control over assets. Their modifiable nature allows changes to be made more easily as your circumstances change
- Your main goal is to avoid probate
Consider irrevocable trusts if:
- Your top priority is minimizing estate taxes
- You want robust asset protection from lawsuits
- You intend to provide for a surviving spouse but want to limit control
- You want to protect your assets from long-term care and nursing home costs
- You want to protect special assets like heirlooms or a vacation property
Many Clients Will Use Both
For many clients, their planning goals will be such that they end up having more than one trust. For example, if you own an heirloom property, you may set up an irrevocable trust that owns that property while using a revocable trust to hold the balance of your assets in order to avoid probate. Many of our clients will set up a family asset protection trust to protect their home and savings from long-term care and nursing home costs while owning the balance of their assets in a revocable trust to help avoid probate.
The optimal trust vehicle depends on your unique situation and priorities. Meet with an experienced estate and elder law planning attorney to decide if a revocable or irrevocable trust is the right strategy for you. With proper set up tailored to your needs and goals, the ideal trusts can provide you key benefits like tax savings or probate avoidance. Reach out to us today by calling our Florida office at (941) 909-4644 or our Minnesota office at (763) 420-5087 or fill out the contact from on this page to examine how trusts and customized planning can be used to create an effective estate plan for you.
And if you are not yet ready to get started on your own plan, or to update your existing one, and would like additional information we have two additional resources for you.
If you would like to learn how to make it as easy and inexpensive as possible for your family to manage your affairs during incapacity and after passing, while ensuring your assets only go to whom you want and how you want, click here to register for our FREE online masterclass.
And, if you would like to learn how to protect your home and life savings from long-term care and nursing home costs, click here to download our FREE guide Save our Home: How to Protect Your Home and Life Savings From Long-Term Care and Nursing Home Costs.
