Happy middle-aged couple reviewing options for revocable vs. irrevocable trusts with an estate planning attorney

Many people believe that trusts are only for the very wealthy. However, trusts are tools that anyone can use to control how their wealth is protected and used, no matter their financial situation. If you are considering creating a trust, or would like further information about revocable vs. irrevocable trusts, consider contacting an experienced estate planning attorney at the Roulet Law Firm, P.A. You can reach our Florida office by calling 941-909-4644 or our Minnesota office by calling 763-420-5087 or fill out the contact form on this page and a member of our team will reach out to you.

What Is a Trust?

A trust is a legal arrangement formed for the purpose of holding certain assets. Trusts may be formed by organizations as well as by individuals; however, in the context of estate planning, a trust will most often be formed by an individual or perhaps a couple with shared assets and financial goals. The primary purpose of a trust is to ensure that the assets are managed according to the intentions of the party who creates the trust and places assets into it, otherwise known as the trustor or grantor.

Once assets have been placed into a trust, a trustee is appointed to manage the assets. The trustee is also responsible for making investment decisions and distributing the assets to the individuals indicated after the owner of the trust passes away. According to Cornell Law School, the trustee has a duty to act in the beneficiary’s best interests. This means that the trustee must manage the trust according to the rules established when the trust was created. Such rules commonly include disbursing assets to the specified beneficiaries, which can be organizations or individuals. Sometimes the trust may place specific conditions the beneficiaries must meet for the trustee to release assets.

What To Know About a Revocable Trust

There are two main types of trusts: revocable trusts and irrevocable trusts. A revocable trust allows the owner to alter the terms whenever they want. Examples of such changes might include removing beneficiaries, choosing new ones, and adjusting the rules around how the trust’s assets are controlled. According to the American Bar Association (ABA), a revocable trust can help individuals manage their assets as well as protect them in the event that the trustor or grantor becomes disabled, ill, or challenged due to symptoms of aging. Moreover, these trusts can help people avoid probate.

However, while revocable trusts offer several advantages, there are also several disadvantages to consider. For instance, because the owner of a revocable trust remains in control of the trust, any assets held in the trust are not protected from creditors in the same way as those held in an irrevocable trust. If the trust owner is sued, the assets in the trust may be ordered to be liquidated to pay off any judgment. Additionally, once the grantor of a revocable trust passes away, the trust’s assets are subject to estate taxes.

What To Know About an Irrevocable Trust

In comparison, irrevocable trusts have terms that cannot be changed after the trust’s founding documents have been signed and the assets placed into the trust. This means that making changes to an irrevocable trust is only possible in certain tightly limited circumstances, and would generally require unanimous consent from all beneficiaries, an order from the court, or if you include provisions for a trust protector, the trust protector can make changes. The particular requirements may vary according to state laws.

An irrevocable trust structure is often chosen for its tax benefits. By setting up an irrevocable trust, the benefactor can remove their estate assets that are taxable, which means that these assets will not be subject to certain types of taxes once they pass away. Additionally, if the trust is a grantor trust, the creator of the trust will be responsible for paying the income tax on the trust assets. Consequently, the beneficiary will not have to pay any income tax on the distributions. However, if the trust is not a grantor trust, the trust will have to pay income taxes on the assets during the time they are in the trust, and the beneficiary will be responsible for paying income taxes on the distributions.

Unlike a revocable trust that does not provide you with creditor protection, an irrevocable trust can shield your assets in addition to providing estate tax savings. For example, a domestic asset protection trust or “DAPT” is a type of irrevocable trust that can protect your assets from creditors. An irrevocable life insurance trust or “ILIT” can keep the value of life insurance policies outside of your estate for estate tax purposes, while still making the proceeds available to your family. A Medicaid Asset Protection Trust – or the enhanced version of it that we use for our families known as the Family Asset Protection Trust – can protect your home and life savings from long-term care and nursing home costs.

The Major Differences Between a Revocable and Irrevocable Trust

Most people create trusts for specific reasons, such as protecting their estate and securing their future. Deciding whether to establish a revocable or irrevocable trust will depend on these protections, as there are significant differences in the way these two distinct types of trusts are set up and how they operate.

The grantor of a revocable trust retains the ability to modify the trust’s terms even after the trust documents have been finalized. An irrevocable trust, on the other hand –– as the name suggests –– is not generally open to alteration once the trust has been established. Therefore, irrevocable trusts are typically less flexible. However, an irrevocable trust can protect assets from specific types of estate taxes and creditors, which means that an irrevocable trust provides a degree of protection a revocable trust cannot provide. To review the differences between revocable vs. irrevocable trusts in more detail, contact the Roulet Law Firm, P.A., and speak with an experienced estate planning attorney today.

Determining Which Type of Trust To Choose

While revocable trusts tend to be more common because of their flexibility, many factors come into play when deciding whether a person should choose a revocable or an irrevocable trust. In general, individuals often tend to choose a revocable trust if:

  • They want to transfer their assets to their loved ones in private and avoid the probate process.
  • They believe that their decisions will change in the future, and they want the freedom to make changes to their trust.
  • They want to continue to manage and use their assets without restrictions.

On the other hand, people may consider an irrevocable trust if:

  • They want to try to avoid estate taxes.
  • They are comfortable with giving up control of their assets after the trust is established.
  • They want to protect assets from future creditors.

As you can see, many clients will choose to have more than one trust depending on their planning needs. For example, many clients will have a Family Asset Protection Trust set up to protect their home and life savings from long-term care and nursing home costs and then a revocable trust to avoid probate on assets they are keeping outside of their irrevocable trust. Working with an experienced and skilled estate planning attorney can help you understand each of these factors and how they relate to your specific situation. These legal professionals may also be able to provide you with the information you require to decide which trust may be the better option for your needs, family, and future.

Learn More About Your Trust Options

Roulet Law Firm, P.A. maintains offices in Florida and Minnesota and provides clients with a variety of services to meet their individual needs. In terms of estate planning services, our team offers the following services:

  • Wills and trusts
  • Special needs planning
  • Power of attorney
  • Minor children protection
  • Powers of attorney
  • Irrevocable life insurance trusts
  • Charitable planning
  • General irrevocable trusts
  • Legacy planning

To learn more about the differences between revocable vs. irrevocable trusts, or if you want to explore your options when it comes to creating an estate plan, reach out today by calling 941-909-4644 to reach our Florida office or 763-420-5087 to reach our Minnesota office or fill out the contact form on this page and a member of our team will contact you to schedule a consultation.

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And if you are not yet ready to schedule a consultation, but would like more information, click here to sign up for our free online masterclass where I share insider strategies for your will, trust, health care directive, power of attorney, how to save on estate taxes, protect your assets, and more.

Protect Your Home from Nursing Home Costs

And if you would like to learn how you can protect your home and life savings from long-term care and nursing home costs, click here to sign up for our online masterclass where I reveal strategies for protecting your home and retirement nest egg from long-term care costs.

Chuck Roulet
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Nationally Recognized Estate Planning Attorney, Author, and Speaker
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