Irrevocable Trusts Versus Revocable Trusts: Determining What is Right for You

 Posted on September 16,2022 in Estate Planning

The last will and testament is the fundamental estate planning document. However, there are many other estate planning tools that can better meet unique financial needs and personal objectives. Unlike a will, a trust is a separate legal entity that can own assets and distribute them according to the terms of the trust agreement. A key advantage of a trust is that it can help avoid probate, which is the legal process used to validate a will and distribute a deceased person's assets.

There are two main types of trusts: irrevocable and revocable. As the name suggests, an irrevocable trust cannot be modified or revoked once it has been created. A revocable trust, on the other hand, can be modified or revoked at any time by the grantor, as long as they are alive and competent. Both types of trusts have their own advantages and disadvantages that should be considered before deciding which is right for you.

Advantages of an Irrevocable Trust

Asset Protection - One of the main advantages of an irrevocable trust is that it can protect your assets from creditors and lawsuits. Once you transfer assets into an irrevocable trust, they are no longer legally owned by you. This means that creditors cannot go after them to satisfy your debts.

Estate Tax Savings - Another advantage of an irrevocable trust is that it can help you save on estate taxes. When you die, your estate will be subject to estate taxes. However, if you transfer assets into an irrevocable trust, they will not be included in your estate for tax purposes. This can potentially save you a significant amount of money in taxes.

Disadvantages of an Irrevocable Trust

Loss of Control - One of the main disadvantages of an irrevocable trust is that you lose control over the assets that are in the trust. Once you transfer assets into the trust, you are no longer the legal owner of those assets. This means that you cannot sell the assets or use them as collateral for a loan.

Difficulty Modifying or Terminating - Another disadvantage of an irrevocable trust is that it can be very difficult to modify or terminate. Once you create an irrevocable trust, you are generally stuck with it. If your circumstances change or you want to change the terms of the trust, you may have to go through a lengthy and expensive legal process to do so.

Advantages of a Revocable Trust

Flexibility - One of the main advantages of a revocable trust is that it is very flexible. You can change the terms of the trust at any time, as long as you are alive and competent. This means that you can adjust the trust to suit your changing needs and circumstances.

Avoidance of Probate - Another advantage of a revocable trust is that it can help avoid probate. Probate is a legal process that is used to validate a will and distribute a deceased person's assets. If you have a revocable trust, your assets will not have to go through probate when you die. This can save your loved ones time and money.

Disadvantages of a Revocable Trust

Less Asset Protection - One of the main disadvantages of a revocable trust is that it does not provide asset protection. Creditors and lawsuits can still go after the assets in a revocable trust to satisfy your debts.

Potential for Estate Tax Liabilities - Another disadvantage of a revocable trust is that it could potentially increase your estate tax liability. This is because the assets in a revocable trust will be included in your estate for tax purposes when you die. This could potentially increase the amount of taxes your loved ones will have to pay.

Contact a Wheaton Estate Planning Lawyer

At Stock, Carlson & Asso. LLC, we provide dependable legal guidance and support throughout the estate planning process. Our skilled DuPage County trust attorneys can evaluate your needs and help you determine which estate planning tools best meet those needs. Call 630-665-2500 for a free consultation.

Source:

https://www.investopedia.com/terms/i/irrevocabletrust.asp