Understanding Revocable and Irrevocable Trusts

Posted by MoneySavvy on Jun 26th, 2010 | no comments home title

Revocable and irrevocable trusts have differences that can affect the way your property passes on to your loved ones upon your death or even while you are living.

Revocable Trusts

A Revocable Trust can also be called a Revocable Living Trust or Living Trust. Essentially a Revocable Trust is a trust that can be changed at any time. Should you change your mind about your beneficiaries or even the trustee to administer the trust, you can make those changes by adjusting the terms of the trust through something called a trust amendment.

While this flexibility can be very useful, there is a downside to a Revocable Trust and that is the fact that assets within the trust are still considered part of your personal assets. As such, this means that creditors can get access to your assets and the estate will be subject to estate tax.

Some people still choose to use a Revocable Trust because they know that their health or mental state is deteriorating and would rather appoint a Disability Trustee to manage their trust upon their incapacity to do so, rather than have their estate taken over by a court-appointed conservator or guardian.

Revocable trusts can also be used to avoid having your will go through probate court. Assets held in a Revocable Living Trust at the time of a person’s death can pass directly to beneficiaries without having to undergo the probate process.

Irrevocable Trusts

As the name implies, Irrevocable Trusts cannot be changed after the trust has been created. It should also be noted that Revocable Trusts can be designed to become irrevocable after the death of the trust maker.

When the trust maker dies, an Irrevocable Trust can be broken into separate irrevocable trusts to support a surviving spouse or into numerous irrevocable lifetime trusts for the benefit of other beneficiaries, including children.

When a person’s assets are put into an Irrevocable Life Insurance Trust, the value of the property is removed. If the deceased no longer owns assets of value the Trust cannot be taxed. The assets are in fact passed onto the trustee and beneficiaries through the Life Insurance Trust.

Asset Protection

As is evident above, an Irrevocable Trust can also be used to protect the trust maker’s assets while she is alive. When a trust maker transfers her assets into an Irrevocable Trust she gives up control and access to those assets. The trustee now has complete control of the assets. The trustee maker can still, however, provide financial assistance to her family with this kind of trust.

The family in this situation becomes beneficiaries of the trust and in that way continue to receive financial support. The major benefit is that while the family can receive support from the trust, the income they receive cannot be accessed by creditors.