Understanding The Difference Between Revocable And Irrevocable Trusts
A trust creates a legal entity designed to protect, grow, and distribute estate assets. There is a common misconception that trusts are only useful for wealthy people. However, there are different reasons for setting up a trust even if you do not have a lot of wealth. Some of the more popular reasons for creating a trust are for providing for the care of minor children and avoiding probate upon death. Before determining if a trust is necessary for your estate plan, it is important to understand who are the parties involved with a trust and the difference between revocable and irrevocable trusts.
Parties To A Trust
- Grantor or Settlor – The person who creates the trust with the intent of holding assets for the benefit of some other person, group of people, or legal entity.
- Beneficiary – The person, group of people, or legal entity receiving benefits from the trust.
- Trustee – The person, group of people, or legal entity named by the grantor/settlor to manage, protect, and distribute trust assets.
A revocable trust (sometimes referred to as revocable living trust, living trust, or inter vivos trust) is simply a type of trust that can be changed according to the wishes of the grantor, throughout the grantor’s lifetime. If the grantor of a revocable trust should have second thoughts about a trust provision, the grantor may modify the terms of the trust through a trust amendment. The grantor may also revoke the entire trust agreement if he or she should decide to do so.
A revocable trust takes effect during the life of the grantor and becomes irrevocable at the grantor’s death. These trusts are typically made to avoid probate. Creating a revocable trust can be the best way to ensure that a grantor’s property remains available to him or her, should the grantor become incapable of managing his or her own affairs. If someone should become disabled with neither a revocable trust nor a financial power of attorney, an expensive court proceeding is generally required to appoint a guardian before his or her property can be used for that person’s benefit.
One disadvantage of a revocable trust is that trust assets remain personal assets for creditor and tax purposes. For income tax purposes, income of the revocable trust will be taxable to the grantor as if the trust never existed.
An irrevocable trust also takes effect during the life of the grantor. However, once an irrevocable trust is executed, it cannot be revoked. These trusts are normally made for the purpose of transferring wealth, to protect assets, or reduce taxes. Like revocable trusts, irrevocable trusts bypass probate and trust distribution is not made public record. Once the grantor transfers assets into an irrevocable trust, the grantor no longer owns them. Because an irrevocable trust is a separate entity from the grantor, trust assets are not taxable to the grantor’s estate upon death.
Drafting a trust, like most legal documents, requires legal assistance and professional judgment. An estate planning attorney can help you decide what type of trust, if any, would be best suited for your financial situation. Bill Hesch is a CPA, PFS (Personal Financial Specialist), and an attorney licensed in Ohio and Kentucky who helps clients with their financial planning. He also practices elder law planning, estate planning, and Medicaid planning in the Greater Cincinnati and Northern Kentucky areas. His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky. Please contact him to determine if a trust is necessary for you or a loved on.