As leading estate planning attorneys in Denton, Texas, we’ve helped countless clients explore the benefits of a revocable trust vs. irrevocable trust to make the best selection for their unique needs and goals. Schedule a consultation online to secure the peace of mind you deserve.
Estate planning isn’t just about creating a last will and testament, achieving tax advantages, or even preserving wealth for your family members and loved ones. At its core, estate planning is about structuring your estate — including all of your assets and property — in a way that best suits your financial goals, needs, and circumstances.
To achieve this, estate planning attorneys rely on numerous tools, one of the most essential of which is the trust. These legal arrangements hold and manage assets for the benefit of the grantor and their beneficiaries, and in doing so, offer substantial advantages. However, the effectiveness of any trust depends on selecting the right tool for the job.
Trusts are not one-size-fits-all arrangements. There are many different types of trusts, each of which falls into one of the two categories: revocable or irrevocable. Understanding the nuances and key differences between these main types of trusts is critical to building a custom-tailored estate plan that functions at the highest level.
Not sure where to get started? Don’t worry — Hunter Sargent, PLLC, is here to help. This article will explore revocable trusts vs. irrevocable trusts, their respective advantages, disadvantages, uses, key considerations when selecting the best trust for you, and more.
Understanding Trusts
In simple terms, trusts are estate planning tools designed to hold, manage, and distribute assets. They are legal arrangements that typically involve three parties:
- The grantor or settlor, who creates the trust
- The beneficiary, who will receive the trust’s assets
- The trustee, who manages the trust on the behalf of the beneficiary
Trusts come in numerous forms and can be tailored to fit various purposes, according to the grantor’s financial situation and goals. Grantors often leave specific instructions, such as conditions for distribution, ensuring that assets are distributed to beneficiaries according to their wishes. Trusts offer many potential benefits, including asset protection, tax advantages, and, depending on the type of trust, the ability to avoid the probate process.
Revocable Trusts
A revocable trust (also called a living trust) is created to hold and manage a grantor’s assets during their lifetime and transfer them upon the grantor’s death. As long as the grantor is alive, they can alter, amend, or revoke the trust at any time, which is why it’s called “revocable.” However, making changes to this trust after the grantor’s death is extremely difficult.
What Are the Advantages of a Revocable Trust?
Revocable trusts offer several notable advantages, depending on the grantor’s specific circumstances. Potential benefits include the following:
- Avoiding probate court. Assets that have been properly transferred into a revocable trust during the grantor’s lifetime typically avoid the probate process and can be distributed to beneficiaries without court intervention.
- Flexibility. The grantor can modify their revocable trust at any time, providing flexibility to adapt to personal or financial circumstances.
- Continuity. If the grantor becomes incapacitated, the named trustee can manage trust assets on their behalf without the need for a court-appointed representative.
- Privacy. Because a revocable trust avoids probate, information about the trust’s assets, beneficiaries, and grantor stays off the public record, protecting the privacy of those involved.
This is not an exhaustive list but only a few of the potential advantages associated with revocable trusts. However, revocable trusts also come with certain drawbacks.
What Are the Disadvantages of Revocable Trusts?
The potential advantages or disadvantages associated with revocable trusts depends heavily on an individual’s financial goals and situation. Here are some of the possible drawbacks of revocable trusts:
- No tax benefits. Unlike irrevocable trusts, revocable trusts offer nothing in the way of tax advantages, as the assets held in revocable trusts are still considered part of the grantor’s estate.
- Cost and complexity. Compared to a will, establishing a revocable trust can be expensive and complex, involving legal fees, ongoing administrative costs, and more.
- No protection from creditors. Unlike irrevocable trusts, revocable trusts offer no creditor protection for the grantor or their beneficiaries.
At the end of the day, revocable trusts come with several distinct advantages and disadvantages. If you’re wondering whether a revocable trust is right for you, an experienced estate planning lawyer can help you explore your options.
Purpose of a Revocable Trust
Revocable living trusts are designed to accomplish a few key tasks: manage and protect assets during a grantor’s lifetime, avoid probate, and ensure beneficiaries receive their inheritance quickly. These trusts also facilitate the management of the grantor’s assets should they become incapacitated, ensuring continuity while offering flexibility and control. Although a valuable tool in estate planning, certain individuals benefit more from the offerings associated with irrevocable trusts.
Irrevocable Trusts
Once established, an irrevocable trust cannot be modified, amended, or revoked by the grantor, setting it apart from the highly flexible revocable trust. After the grantor relinquishes control and ownership of the assets placed in the trust, those assets are managed by the appointed trustee according to the terms outlined in the trust agreement and for the benefit of the named beneficiaries.
What Are the Advantages of an Irrevocable Trust?
An irrevocable trust offers several notable advantages, depending on the grantor’s reasons for establishing it. Possible benefits include the following:
- Tax advantages. As assets placed in an irrevocable trust are no longer considered part of the grantor’s taxable estate, they are not subject to estate taxes upon the grantor’s death. An irrevocable trust may also help reduce the grantor’s income taxes, as assets may be taxed at the trust’s rate rather than the grantor’s.
- Creditor protection. Typically, assets placed in an irrevocable trust are safeguarded from the grantor’s creditors, as well as the beneficiaries’ creditors.
Long-term care planning. By removing assets from a grantor’s estate, an irrevocable trust can help individuals qualify for Medicaid and other government benefits, which can help lower long-term care costs. - Charitable giving. Irrevocable trusts allow a grantor to make significant charitable contributions while reducing their overall tax liability.
In summary, irrevocable trusts can offer significant tax planning advantages, creditor protections, and other benefits. However, they also come with disadvantages.
What Are the Disadvantages of an Irrevocable Trust?
Whether or not an irrevocable trust is right for you depends on several factors, including the grantor’s specific financial circumstances. Similarly, they also come with potential downsides, including the following:
- Lack of flexibility. Compared to a revocable trust, an irrevocable trust offers limited flexibility, as the grantor cannot modify the trust terms once established.
- Complexity and cost. Compared to a last will and testament, establishing an irrevocable trust can be complex and costly, resulting in administrative fees that are higher than other estate planning tools.
- Loss of control. The grantor loses control over assets as soon as they place them in the trust. Instead, the trustee makes decisions about the assets according to the terms of the trust, which don’t always align with the grantor’s changing circumstances.
The benefits or drawbacks associated with irrevocable trusts depend largely on your overall estate planning goals. The best way to find out whether this type of trust is right for you is by seeking legal advice from an estate planning attorney in Denton.
Purpose of an Irrevocable Trust
Like revocable trusts, irrevocable trusts serve a primary purpose: holding, managing, and distributing assets according to the trust document. However, they also accomplish other goals, offering numerous tax advantages and protection from creditors. When properly established, they are powerful estate planning tools. However, irrevocable trusts should only be established after careful consideration because once funded, they are typically unamendable.
The Difference Between a Revocable and Irrevocable Trust
At the end of the day, the main difference between revocable trusts and irrevocable trusts boils down to flexibility and control. Revocable trusts can be amended, modified, and revoked by the grantor during their lifetime, and, as a result, their assets are still considered part of the grantor’s estate. Conversely, irrevocable trusts cannot be changed or revoked after being established, but they do offer considerable tax advantages and protection from creditors, as trust assets are no longer considered part of the grantor’s estate.
Factors to Consider When Choosing Between Revocable and Irrevocable Trusts
As you can see, the differences between these two trusts are considerable, which is why it’s important to consult an experienced trust attorney before deciding between them. When it comes to deciding between a revocable trust vs. irrevocable trust, you will need to assess several key factors, including the importance of the following:
- Your desired control over trust assets
- The level of asset protection you require
- The tax implications for your estate
- Whether or not you want to avoid probate
- The level of long-term care planning you requireThe size and complexity of your estate
- How much you value privacy in your estate dealings
Finally, you should consider which type of trust is a better fit for your overall estate planning goals. Trusts are not stand-alone estate plans; rather, they should fit into a larger, comprehensive strategy that has been expertly designed alongside a legal professional.
Hunter Sargent, PLLC: Leading Trust Attorneys in Denton, TX
Trusts offer numerous potential benefits but only when they are expertly designed and executed. When you are ready to explore the full potential of your estate plan, the trust attorneys at Hunter Sargent, PLLC, are here to help. Contact our law firm online to schedule a consultation with a passionate and knowledgeable Texas estate planning lawyer today.