Revocable vs Irrevocable Trusts: The Pros, Cons, and the Difference
Both revocable and irrevocable trusts have their advantages and disadvantages. If you’re looking for the best way to protect your wealth and assets, read on.
A trust is a special type of fiduciary agreement between two parties. The parties, in this case, being the trustor and the trustee. The trustor initiates the trust agreement, and the trustee agrees to the trust.
In any trust agreement, the beneficiary is usually a third party, close to the trustor. The agreements stipulate how the trustee should manage the trustor’s wealth and assets. This management includes wealth distribution and asset control.
A trust is legal protection for the trustor’s assets in case of the trustor’s demise. Revocable and irrevocable trusts are the main types of trusts. In this piece, we’ll look at revocable vs irrevocable trusts to help you know which to settle for.
We’ll also highlight the main differences between these two trusts and the pros and cons of each trust. We hope this article will help you make an informed decision next time you’re settling for a trust.
What Are the Basics of a Trust?
As we’ve discussed above a trust involves two parties, the trustor and the trustee. Aside from these two parties, the lawyer plays a key role in any trust agreement.
The trustor collaborates with the lawyer to decide the terms of the trust. These terms include how the trustor will transfer assets to the trustee. The trustee then holds on to these assets before handing them over to the beneficiaries.
A trust ensures wealth distribution happens according to the trustor’s wishes. A trust also helps reduce time and save on the paperwork on matters inheritances. In some instances, a trust can avoid inheritance and estate taxes.
The trust can determine the management of the trustor’s wealth. The trust applies when the trustor is alive or in the event of the trustor’s death or incapacitation. A trust may also offer protection from creditors and help avoid taxes and probates.
The downside of trusts is that they require a lot of money. The court may revoke some types of trusts, which brings us to our next discussion, revocable vs. irrevocable trusts.
Revocable vs Irrevocable Trusts?
There are many types of trusts the justice system recognizes. All these trusts boil down to four main categories. These categories are namely funded or unfunded trusts, living or testamentary trust, and irrevocable or revocable trusts.
The last category is our primary interest. So what makes revocable and irrevocable trust so different? Read on to find out.
What Is a Revocable Trust?
You can use living trust interchangeably with a revocable trust. A revocable trust is a type of trust whose terms can change at any moment. A revocable trust thus allows the trustor to change the terms whenever the trustor wishes.
The trustor can also change the beneficiaries or remove some if deemed necessary. The trustor also has the power to change how the trustee manages the assets.
A revocable trust is pretty flexible. As such, it makes sense that most people would want to opt for revocable trusts. However, such isn’t the case because revocable trust has its drawbacks also.
Benefits of a Revocable Trust?
- There is a high degree of flexibility in revocable trusts. The trustor may change the terms of the trust whenever they wish.
- A revocable trust allows some grantors to avoid probate. This type of trust can avoid probate, but so does irrevocable trusts.
- This type of trust is ideal for clients with non-serious tax issues. It allows the trustor to maintain control over the assets as long as the client doesn’t anticipate any mental incapacity in the future.
- If the trustor becomes mentally unstable, the trustee then gains control of the assets. The trustee gains control only when the trustor is mentally unstable.
Drawbacks of Revocable Trusts
- The first con of revocable trusts is that they are expensive. It will usually cost you more to set up a revocable trust than an ordinary will. You may, however, get that money back or part of it when you avoid probate.
- A revocable trust can be complicated. Sometimes asset transfer to the trustee may be time-consuming and complicated. For this reason, you’ll need a good attorney to help you through the process.
- You might need a will also despite setting up the trust. In the event you fail to transfer all assets completely, you’ll need a will to cater to the remaining assets.
What Is an Irrevocable Trust?
Unlike a revocable trust, the terms of an irrevocable trust cannot change after the parties reach an agreement. Once the trustor and trustee sign the agreement, everything is sealed in stone. However, there are a few exceptions to this permanency.
You can’t take assets back from the trustee in an irrevocable trust. A revocable trust usually becomes irrevocable when the trustor dies. It may break into separate revocable and irrevocable trusts for the beneficiaries.
Benefits of Irrevocable Trusts
- You can avoid tax liability when you settle for an irrevocable trust. This avoidance is especially beneficial for clients with large estates.
- You can prevent misuse or mishandling of assets by your beneficiaries. This prevention only happens with a proper irrevocable trust set up.
- You can protect yourself from lawsuits, creditors, and other litigation measures.
Cons of Irrevocable Trusts
- Greater inflexibility as compared to revocable trusts. When you enter an irrevocable trust agreement, you completely lose control of your assets. You can’t change any terms to the agreement.
- In an irrevocable trust agreement, you can’t adapt to unforeseen changes.
Always Work With an Expert
The key take of revocable vs irrevocable trusts is the degree of flexibility for both agreements. While this flexibility is certainly beneficial. It may limit some other benefits of trust agreements.
All in all, remember to have a good lawyer by you when entering trust agreements. Lawyers streamline the process and ensure the best for your beneficiaries.
Have a look at our other pieces for more insightful posts.
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