Trusts come in all shapes and sizes. Each type serves a different purpose, but all trusts can be a powerful estate planning tool when created and funded correctly. In this blog, we discuss the benefits of a revocable trust and compare it to an irrevocable trust.

What Is a Revocable Trust?

Before discussing the differences between a revocable vs. irrevocable trust, it is important to understand the basics of a revocable trust.

A revocable trust, or living trust, is a trust that the settlor (the person who created the trust) can amend or revoke at any time during their lifetime. Because of this flexibility, a revocable trust functions like a will substitute. Typically, the settlor is both the trustee and the beneficiary. Once the settlor dies, the named successor trustee manages and administers the trust for the benefit of the successor beneficiary.

On the other hand, an irrevocable trust cannot be modified or canceled after the settlor signs the trust document. Only in very limited circumstances will a court allow changes to an irrevocable trust.

Benefits of a Revocable Trust

As with any trust, the right one for you depends on your assets, family dynamics, and goals. Here are some advantages of a revocable trust.

Avoids Probate

When the trust settlor dies, the assets held in the revocable trust pass to the beneficiaries directly, without the need to go through the probate process. There is typically no court involvement, which saves the beneficiaries time, money, and hassle. This type of transfer often gives the beneficiaries access to their inheritance faster than if the assets had to go through probate.

Gives You Flexibility and Control

The typical setup of a revocable trust is the settlor names themself as the trustee and the beneficiary while specifying a successor trustee and successor beneficiaries. As the settlor, you have complete control over how the trust operates and what assets it owns as long as you are alive. Depending on your circumstances, you can modify the trust and cancel it entirely.

This is advantageous, especially as situations change for the successor beneficiaries. For example, if your child is a beneficiary, you can adjust the trust terms, conditions, and requirements if you become concerned about their spending habits.

Privacy

Unlike a will, which becomes public record when you die, a revocable trust is a private document. For those who want to keep their assets confidential, a revocable trust offers that kind of privacy.

Continuous Trust Management in the Event of Incapacity

If you lose capacity because of an illness, accident, or injury, your successor trustee steps in to administer the trust. This provides continuity and prevents disruption of the trust’s purpose.

Disadvantages of Revocable Living Trusts

The flexibility to revoke a trust may seem reason enough to include a revocable trust in your estate plan. However, these trusts come with some drawbacks.

Requires Administrative Work

Once you sign a revocable trust document, you should fund the trust. This means you need to retitle assets in the trust’s name, which may require a substantial amount of paperwork. Or you can direct assets to the trust at your death with change of beneficiary forms.

More Costly

Revocable trusts may cost more to draft since they are sophisticated estate planning documents. But if you have a significant estate, the upfront cost of creating a trust will likely be less than the probate expenses your estate may otherwise owe after your death.

No Asset Protection

Putting assets into a revocable trust does not protect them from creditors. Since you still have ownership over the trust during your lifetime, creditors can use trust assets to satisfy a judgment against you. Conversely, assets owned by an irrevocable trust are beyond the reach of creditors.

No Tax Savings

For both income and estate tax purposes, the IRS views property held in a revocable trust as if it were the settlor’s property. Thus, transferring assets into a revocable trust does not provide tax savings.

On the other hand, assets you put into an irrevocable trust are generally not included in the value of your estate. Thus, if you have a large estate, an irrevocable trust can minimize or reduce estate taxes.

Contact the Estate Planning Group at CCHA

To discuss whether a revocable trust vs. irrevocable trust is right for your estate plan, contact our estate planning experts. We’ll work together to create a comprehensive estate plan that meets your needs. The attorneys at CCHA have over 140 years of experience providing legal services. For help with your estate plan, call us or reach out to us online. We look forward to finding out how we can help you.