A trust is a separate legal entity a person establishes to manage their assets. Trusts are set up during a person’s lifetime to assure that assets are used in a way in which the person setting up the trust deems appropriate. Once assets are placed inside a trust, a third party, known as a trustee, manages them. The trustee determines how the assets are invested and to whom they are distributed when the owner of the trust passes away, though a trustee must manage the trust in accordance with the guidelines laid out when the trust was formed. Trusts are also a way to reduce tax burdens and avoid assets going to probate.
There are two basic types of trusts: revocable trust (also known as a living trust) and an irrevocable trust.
Revocable Trust - What Is It?
A revocable trust is also known as a “living trust” because it can benefit you during your lifetime. You can modify or dissolve it if your circumstances or goals change.
Benefits of a Revocable Trust
You stay in control of your revocable trust. There is a high degree of flexibility in revocable trusts - the trustor may change the terms of the trust whenever they wish. You can transfer ownership of property into the trust and take it out, you can serve as the trustee (the individual in charge of managing the accounts and property owned by the trust), and be the beneficiary. You have full control…and most clients like that feature.
Avoids probate. The accounts and pieces of property owned by the trust avoid probate because, although you will pass away, your trust never will. The trust will continue to be the owner of the accounts and property until the trustee has been instructed by the trust document to transfer those accounts and property intended recipients. By avoiding probate, you are saving your loved ones time and money, as well as keeping the details of your estate plan private.
You select the back-up trustees. Should you become unable to the manage the trust, or when you pass, you (not the courts) select who is in charge when you need help.
You determine how your beneficiaries will receive their inheritance. If your beneficiary is young, going through a divorce, bad at managing money, or has a possibility of being sued, a properly drafted trust can protect the money and property you leave the beneficiary.
Irrevocable Trust - What Is It?
The terms of an irrevocable trust, in contrast, are set in stone the minute the agreement is signed. Except under exceedingly rare circumstances, no changes may be made to an irrevocable trust.
The main reason to select an irrevocable trust structure? Taxes. Irrevocable trusts remove the assets from the benefactor’s taxable estate, meaning they are not subject to estate tax upon death, and they also relieve the benefactor of tax responsibility for any income generated by the assets.
IMPORTANT: The benefactor, having transferred assets into the trust, effectively removes ALL rights of ownership to the assets and, for the most part, all control.
Benefits of a IRRevocable Trust
Avoid Tax Liability. You can avoid tax liability when you transfer your assets to an irrevocable trust. This avoidance is especially beneficial for clients with large estates.
Avoid misuse or mishandling by your beneficiaries. You can prevent misuse or mishandling of assets by your beneficiaries. This prevention only happens with a proper irrevocable trust set up.
Legal and Financial Protection. You can protect yourself from lawsuits, creditors, and other litigation measures.
always work with an expert
The key takeaway from revocable vs irrevocable trusts is the degree of flexibility for both agreements. While this flexibility is certainly beneficial, it may limit some other benefits of trust agreements.
As an experienced estate planning attorney, Suzan Pruter can help you figure out whether a revocable or irrevocable trust is a good fit for you and your loved ones.
Suzan L. Pruter
Suzan, whose father was a lawyer and an active member of the American Trial Lawyers Association, grew up in an environment that included lawyers, judges, and even Supreme Court Justices in California - so becoming a lawyer was in her nature. She earned her Bachelor of Arts in Communications from the University of Arizona and graduated cum laude from Florida Agricultural & Mechanical University College of Law. While in law school, Suzan was recognized by the Central Florida Bankruptcy Lawyers Association for her academic excellence in Bankruptcy Law, was the recipient of numerous book awards, and participated in Moot Court. Before finding her passion in Estate Planning, Suzan practiced as a certified legal intern in the Criminal Defense Clinic and Children’s Legal Services, however it was her own personal experience of dealing with inadequate estate planning that fueled her passion to where she is today.
