Choosing the right tool often requires specific knowledge. You have to know what you want to accomplish and what the tool can do. When preparing your estate plan, you have a number of tools from which to choose, including revocable and irrevocable trusts. Both offer advantages and disadvantages. However, in a direct, head-to-head face off – revocable vs. irrevocable trust – which better suits your needs?
Let’s compare revocable and irrevocable trusts in three categories: probate avoidance, asset protection, and tax reduction.
Revocable vs. Irrevocable Trust: Probate Avoidance
Probate is the process by which the property of a deceased person, called an estate, is administered. During probate, the estate’s personal representative gathers the decedent’s assets, collects creditors’ claims, pays valid claims and debts of the estate, then distributes the remaining assets to the appropriate heirs.
Probate sounds like it could be time-consuming and costly. Sometimes it is.
One way to avoid probate is to establish a trust. When the grantor of a trust dies, the assets in the trust generally pass to beneficiaries according to the terms of the trust document.
Winner? It’s a tie. Both revocable and irrevocable trusts help grantors and their heirs avoid probate.
Revocable vs. Irrevocable Trust: Asset Protection
Another reason to create a trust? Protecting your hard-earned property.
Assets transferred to a revocable trust remain under the control of the grantor. In fact, the assets are still considered to be the grantor’s property. Because the property is accessible to the grantor, it is vulnerable to civil judgments and creditor claims against the grantor.
However, the grantor no longer controls property transferred to an irrevocable trust. Generally, this means that property is protected from claims.
Winner: Irrevocable trusts typically offer greater asset protection than revocable trusts.
Revocable vs. Irrevocable Trust: Tax Reduction
Even with the recent increase in the IRS estate tax limit to $11.2 million, reducing or eliminating estate taxes may be a concern.
Just as with asset protection, the grantor of a revocable trust remains in control of trust assets. The grantor may continue to owe taxes while living, and estate taxes may be due for estates valued at more than the IRS limit at time of death.
Irrevocable trusts, on the other hand, typically do not become part of the grantor’s taxable estate.
Winner: An irrevocable trust generally offers better tax reduction than a revocable trust.
Which Is Right for You?
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Written by: John Mangan, JD, MBA