Revocable And Irrevocable Trusts: What’s The Difference?
When it comes to trusts, things aren’t one size fits all. There are different kinds of trusts that provide different advantages and drawbacks. Two major categories of trust are revocable and irrevocable trusts. What’s the difference between these trusts, and which is right for you?
What’s the Difference between Trusts?
With an irrevocable trust, when property is put into the trust, the grantor—the party creating the trust, and putting their property into the trust—gives up all rights to use or control the property. The property is managed and property distributed by a neutral third party trustee, according to the rules set up when the trust is created.
Revocable trusts are very different. Here, the person who makes the trust still controls the property put into the trust, and can amend the terms of the trust whenever needed. Although revocable, there is still a trustee, and still rules that the trustee must follow. In many cases, the trustee will only have to do any work should the grantor be incapacitated.
Initially, you may think a revocable trust is better, because after all, isn’t it better to have control over the property you put in trust as opposed to giving up control?
One major difference is when it comes to taxation. An irrevocable trust is considered a separate entity than you are, to the IRS. That means that the trust gets its own Tax ID number. Because the trust is different from the grantor, personally, the grantor may save some money on taxes.
Additionally, because you aren’t passing on assets—technically, the trust, a separate entity is—you get to avoid estate taxes, in the event that there are enough assets being passed on to worry about estate taxes.
On the other hand, the trust may end up paying more taxes because it, as a non-living human being, may not get certain benefits and deductions that you can claim.
With a revocable trust, any money made by, or appreciation in value of assets put into the trust, are considered one and the same as the grantor. That means it is included in the grantor’s income total, for tax purposes.
Asset Protection Advantages
One huge advantage to an irrevocable trust, is the benefit of asset protection—property put into an irrevocable trust is generally considered safe from creditor collection claims.
However, this is only when the trust is created before there is a threat of property being taken. You can’t just create a trust when you have a claim against you. That’s why it’s best to set up your irrevocable trust as soon as possible—so that you can get it set up before any creditor claims appear.
A revocable trust gets no creditor protection given that it’s just treated like your own property, and the trust is not a separate legal entity.
Call the Torrance estate planning attorneys at Samuel Ford Law today for advice on what kind of estate planning methods are right for your particular situation.