What is the Difference Between Revocable and Irrevocable Living Trusts?
Full Question:
Answer:
A trust is an entity which owns assets for the benefit of a third person (beneficiary). A living trust is an effective way to provide lifetime and after-death property management and estate planning. When you set up a living trust, you are the grantor; anyone you name within the trust who will benefit from the assets in the Trust is a beneficiary. In addition to being the grantor, you can also serve as your own trustee (original trustee). As the original trustee, you can transfer legal ownership of your property to the trust. This can save your estate from estate taxes when you die. Just remember that it does not alleviate your current income tax obligations.
Trusts can be revocable or irrevocable. The revocable trust can be amended or discontinued at any time. An irrevocable trust cannot be modified or discontinued. A revocable living trust does not constitute a gift, so there are no gift tax consequences in setting it up. This trust may become irrevocable and unchangeable when the only person who can amend or revoke the trust dies or becomes incompetent.
The advantages of the living trust include the following:
(1) automatically avoids all probate of the property;
(2) avoids all legal fees and expenses associated with probate;
(3) provides for property management or disbursement;
(4) assures uninterrupted income and access to principal for family beneficiaries;
(5) avoids the emotional trauma, aggravation and frustration of a complicated probate court procedure;
(6) maintains privacy - nothing is printed in the newspaper as is the case when a person dies either in testate (no will) or with only a will;
(7) eliminates time delays in settling the estate - the successor trustee can immediately disburse the funds as indicated in the revocable living trust agreement;
· The main difference between a revocable trust and an irrevocable trust is that with an irrevocable trust, the settlor (i.e. trust creator) maintains no control or interest in the trust. In a revocable trust, the assets within the trust are still within the reach and control of the trust creator. The individual who created a revocable trust maintains the ability to amend and the power of revocation and will maintain ultimate control of the property held in the trust. In contrast, with an irrevocable trust the settlor relinquishes all control of the trust and the assets it contains. Once an irrevocable trust is made, the creator of the trust maintains no control, has no power to revoke, and has no claim of ownership in the trust property. The benefits of an irrevocable trust are largely related to tax benefits for the settlor. revocable trust does not have the same tax benefits; however, the property within the trust is still within the control of the trust creator. Historically, irrevocable trusts have the form of choice for charitable trusts and family wealth vehicles.
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· A revocable trust is completely flexible. You can change or cancel it at any time depending on your financial situation or changes in your family relations. An irrevocable trust is a trust which cannot be changed or canceled once it is set up without the consent of the beneficiary. With an irrevocable trust, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less. Creditors of an individual setting up an irrevocable may not be able to reach the assets in an irrevocable trust since they are no longer owned by the individual. It is possible to structure an irrevocable trust in a way that can avoid capital gains taxes. You lose all control over the property with most irrevocable trusts.
