Revocable vs. Irrevocable Trust: What’s the Difference?
Trusts come in two main categories: revocable and irrevocable trusts. Choosing which one is right for you can be one of the most important decisions of your life, but you can’t possibly be expected to make this decision without a proper understanding of what the difference is between the two. That’s why we’ve created this quick guide which compares the difference between the two types of trusts so that you can be confident in your decision as to which one is best for you.
What is a Trust?
A trust is a financial agreement between three people: the trustor, the trustee, and the beneficiary. Essentially what happens, is that the trustor (also known as the grantor) grants his or her assets to the trustee, who will then take control over them. The trustee is then responsible for managing those assets until the grantor dies, at which point they are given to the beneficiary.
Why Should I Have a Trust?
Trusts are a great way to manage your property, estate, and finances during the life and death of the trustor. Additionally, they provide an easier way to endow possessions and funds to a beneficiary without paying steep taxes. Additionally, trusts can be used to manage assets which are being held for a minor or someone who is otherwise incapable of managing it themselves.
Revocable vs Irrevocable Trusts
Now that we know what a trust is, we must learn what the difference is between a revocable and irrevocable trust. The most fundamental difference between these two types of trusts is that in a revocable trust, funds stay in the grantor’s estate, whereas in an irrevocable trust, they move out of the estate (and belong henceforth to your beneficiaries). Additionally, a revocable living trust is one that can be changed at any time; an irrevocable trust is one that cannot be changed by the grantor.
If a Revocable Trust is So Flexible, isn’t this the Best Choice?
Not necessarily. While revocable trusts do have this level of flexibility, which means less risk for you if you decide you need access to those funds, it also means that all the assets that are transferred into the fund are still technically yours and you will be charged accordingly by creditors and tax collectors.
A revocable trust is also not protected in the event that you are sued – because you still technically retain ownership of your assets, that means, if you’re ever sued for whatever reason, someone can come after them.
How Does This Differ From Irrevocable Trusts?
As the name suggests, an irrevocable trust is one that cannot be changed, modified, or terminated by the grantor – the only person or people who can make any changes to the trust are the beneficiaries. While this option gives you less control of your assets, it also means that it cannot be taxed, nor can someone come after any assets you have put into the trust if you are sued.
So, Why Not Just Get a Will?
Though they may sound similar on the surface, a will and a trust have two completely different purposes. Everyone should have a will, but not everyone needs a trust. A will only comes into play after you die, and gives details and instructions such as who should be the legal guardian or your children, funeral arrangement wishes, and designated divide of who gets your assets that are your property only – like your diamond wedding ring or other small yet valuable items. Additionally, a will will always have to go through probate, which means the court will oversee everything.
On the other hand, you don’t have to wait until you’re dead for a trust to be in effect, and it will not give information as to who should take care of your children or your pets. Instead, the purpose of a trust is to have a third party serve as the holder of your assets, with clear instructions as to who is supposed to receive what. Additionally, in most cases, a trust does not need to go through probate, which means your beneficiaries will be saved a lot of time and money. The assets within a trust are typically things like your house, life insurance, unused retirement funds, and more.
Please keep in mind that a trust does not supersede your life insurance designations – whoever you designated to be the beneficiary on your life insurance policy will remain so even if you specify otherwise in your trust. A way to loophole this, however, is that you can name the trust as your beneficiary on your life insurance, and then assign those assets to be divided as you choose.
Making the Right Decision
Whether you are sure of which kind of trust is right for you or if you still need some direction and clarity, Siegel Law Group is here to help you make sure your assets and beneficiaries are in good hands. Call us at 855-FLA-ESTATE or contact us here to start securing the future of your children and other beneficiaries.