Revocable vs Irrevocable Trusts: They are Very Different!
What is a Revocable Trust?
A revocable trust, also called a living trust, is an estate planning tool created during your lifetime that determines the beneficiaries of your estate after your death. You remain the owner of your trust and the property it includes. The terms can be changed at any time.
While revocable trusts avoid probate issues, they have no effect on state or federal income taxes.
What is an Irrevocable Trust?
An irrevocable trust is a type of trust that takes control away from the grantor of the trust. Once you place assets in an irrevocable trust, you no longer own the assets. It cannot be changed in any way unless the changes are approved by the beneficiary or beneficiaries.
The main reason for setting up an irrevocable trust is for estate and tax purposes. For example, if an individual has a high net worth, a property could be placed in a type of irrevocable trust where the property would not be considered part of the estate and the value of the property would not get taxed as part of the estate.
Revocable or Irrevocable? We Recommend Consulting with an Attorney.
We asked Christopher Longwell, an attorney with Barron Peck Bennie & Schlemmer, who specializes in real estate law and estate planning, for further information and clarification about revocable versus irrevocable trusts. Following is Christopher’s professional response:
“Revocable and irrevocable trusts are used for different purposes. Revocable (living) trusts are very good for probate avoidance and controlling how and when your beneficiaries receive their inheritance.
Irrevocable trusts are very good at helping with tax avoidance for high net-worth individuals, creditor protection if done prior to the incursion of the debt (i.e. not to avoid the debt), and, if done with enough time in advance, avoiding Medicaid recovery after death, assuming you get past the lookback period.
However, as in most things in life, there are always tradeoffs. The biggest tradeoff is that living trusts allow you complete control over the property held in trust, whereas irrevocable trusts put some or all limitations on that control over the asset.
For example, in Ohio we have the Ohio Legacy Trust that gives the benefits of liability protection, but also allows the grantor of the trust the ability to annually receive all of the income from the trust, as well as up to 5% of the principal, among other things.
As always, I also counsel that everyone should work with their attorney regarding their situation and allow the attorney to help educate them on all of their choices so the client may take all of the positives and negatives into account as they make these decisions.”
Please contact us if you have questions regarding taxes on your revocable or irrevocable trust.