Introduction
A trust is a means of transferring your assets to a beneficiary. There are many kinds of trust, two of which are revocable trust and irrevocable trust. A revocable trust is the only kind of trust that is changeable. Even after you set up the trust, you can change your beneficiaries and asset distribution terms. In contrast, in an irrevocable trust, you cannot change the terms or beneficiaries after you sign the assets over to the trust.
There is several more difference between the two types of trusts. This article will explore those in detail.
Revocable Trust vs Irrevocable Trust
A revocable trust is subject to change. If a grantor wishes to distribute some of his assets, but still wants to have control over the assets during his lifetime, he can set up a revocable trust. A revocable trust will not help if you avoid loans. If may have to liquidate your revocable trust to pay off creditors. However, a revocable trust does have many benefits. It does not have to go through probate court and therefore makes the process of transfer easier. It also provides a certain level of privacy.
An irrevocable trust is not subject to change. The grantor can distribute his assets, but he loses control over the assets when he signs them over to the trust. An irrevocable trust has protection from creditors. Since you are no longer the owner of the assets, creditors cannot force you to liquidate an irrevocable trust for repayments. An irrevocable trust also does not go through probate court.
Difference Between Revocable Trust and Irrevocable Trust in Tabular Form
| Parameters of Comparison | Revocable Trust | Irrevocable Trust |
| Meaning | A trust which the author can cancel at any time during their lifetime | A trust which the author cannot cancel after it goes into effect |
| Control | Control remains with the trust creator | Control does not remain with the trust creator |
| Objective | Eliminate probate | To eliminate the estate tax |
| Alteration | A revocable trust can be altered anytime | An irrevocable trust cannot be altered |
| Tax | The grantor will have to pay some amount of tax for the income from the assets | The grantor does not have to pay tax for assets in the irrevocable trust |
| Protection | The assets in a revocable trust are not completely protected from creditors | Creditors cannot ask for repayment from assets within an irrevocable trust |
| Purpose | Estate planning | Estate planning, avoiding taxes, protection of assets, charity |
What is Revocable Trust?
A person creates a trust to transfer their assets to people. A trust, which the author can later change or terminate, is a revocable trust. Another name for revocable trust is “living trust”. A trust involves three people, the grantor, the trustee, and the beneficiary. The person who currently owns the asset is the grantor. The grantor appoints another person to oversee the execution of the trust. This person is the trustee. The individual receiving the assets is the beneficiary.
The grantor of a revocable trust can add or remove people as beneficiaries. He can remove beneficiaries any time they wish. They can appoint a new person as the beneficiary. In addition, he can change the conditions of the division of assets and can even change the assets in the trust.
In a revocable trust, the author remains the owner of the assets during his lifetime. In addition, he will have control over the assets. After the death of the grantor, the revocable trust changes into an irrevocable trust. The trustee will transfer the assets to the beneficiary.
Since the grantor remains the sole owner of the trust until his demise, the assets in the trust are vulnerable to creditors. If the grantor owes money to people and has a revocable trust in his name, the creditors can sue him for the assets in the trust. The grantor will then have to liquidate his assets in the trust and pay off the debt. After the demise of the grantor, the assets in the trust are subject to taxes.
Creating a trust helps to avoid probate court. The beneficiaries will receive the assets without having to fight for them in court. It makes the transfer process easier.
Pros of a Revocable Trust
Flexibility
A revocable trust is flexible. If the grantor wishes to make any changes to the conditions of the trust, he can do it. He has control over the trust until his demise. The grantor can change beneficiaries by adding or removing them. They can also change the assets and their distribution conditions.
Privacy
Assets in a trust do not go through a probate court. Hence, the grantor can keep the nature and amount of the assets private.
No Probate Court
A person’s assets often have to go through probate court after his demise. The court decides how to divide the assets among the beneficiaries. Going through probate court is a time-consuming and expensive process. In addition, the court may divide your assets differently than your wish. When you put assets in a revocable trust, you can avoid probate court. Your beneficiaries will receive the assets according to the conditions in the trust. Hence, you can ensure the correct allotment of your assets.
Aids Management of Assets
When setting up a trust, a grantor can appoint a trustee for managing the trust. In the unlikely event, the grantor becomes incapacitated; the trustee will still manage the trust. After the demise of the grantor, the trustee will ensure the proper management of assets in the trust. He will be responsible for transferring assets to the beneficiaries promptly. Hence, putting assets into a trust helps with its proper management. The grantor does not have to worry about his assets.
Tax Leniency
A revocable trust helps with tax savings. Since the assets in a revocable trust remain in the grantor's name until his demise, the grantor will have to pay taxes for income from the assets. However, he will get certain tax benefits for assets in a revocable trust.
Protection
Assets in a revocable trust receive extra protection. The grantor can protect his assets in the event of a divorce, or other legal problems.
Succession Planning
Since assets in a revocable trust do not have to through a probate court, the beneficiaries will receive the assets without much hassle. In addition, the process will be quick. Hence, putting your assets in a revocable trust will ensure your beneficiaries receive them at the proper time.
Customizable
A revocable trust accounts for minor children and disabled beneficiaries. You can write the conditions of the trust accordingly. You can appoint a trustee to transfer the assets to the children when they come of age. You can also create conditions that allow for the transfer of assets to disabled beneficiaries at regular intervals.
Cons of a Revocable Trust
Complexity
Setting up a revocable trust is a complicated process. If you want to create a revocable trust, you will require the help of an experienced lawyer and a financial advisor.
Expensive
Setting up and managing a revocable trust is expensive. You will have to pay lawyer fees and any other legal fees.
Less Control
The grantor retains control over their assets during their lifetime. However, after their demise, the control of the assets solely goes to the beneficiaries. They can do as they see fit with the assets.
Less Protection
A revocable trust offers less protection from creditors than other types of trust. If you have loans or other credit to pay, the creditors can get a court to order you to liquidate your assets can make the payment.
Tax Liabilities
Even though the grantor will experience certain tax relaxation by placing assets in a revocable trust, he will still have to pay taxes. The assets in a revocable trust remain under the grantor's name and control. Hence, all income generated from the assets goes to the grantor. Therefore, he will have to pay taxes for them.
Conflicts Between Beneficiaries
Dividing assets and placing them in a trust can lead to conflicts between family members. If you fail to mention the terms and conditions of the division of assets clearly, your beneficiaries may end up disputing the assets.
Public Record
After the grantor's demise, the terms of a revocable trust become public record. Hence, a revocable trust does not offer much confidentiality.
Creditors
Since the grantor remains the owner of the assets in a revocable trust, his creditors can sue him for the assets.
What is Irrevocable Trust?
An irrevocable trust is a type of trust, which the grantor cannot modify or terminate after he signs the trust and it has gone into effect. After the grantor signs the trust, it goes into the trust. He loses control over the assets. If the grantor wishes to make changes in the trust after it has gone into effect, he can do so only with the permission of the beneficiary. In case the beneficiary does not agree to changes, the grantor will have to go to court and appeal.
Creating an irrevocable trust offers certain benefits. One it protects from creditors. Since the assets are no longer in your control, the creditors cannot demand the assets as repayment. Hence, the assets remain protected. Two, it helps the grantor avoid tax. Since the property is no longer under the grantor's name; he does not have to pay tax for it. Additionally, the assets will not be subject to estate tax after the demise of the grantor.
Setting up an irrevocable trust is a complicated process. You will require the help of a qualified lawyer. However, setting up an irrevocable trust is essential for people working in fields prone to lawsuits, for example, the medical field or law. If you receive a lawsuit and have to pay a fine, the court cannot order you to liquidate an irrevocable trust. Hence, your assets remain protected.
Pros of an Irrevocable Trust
Protection
When you place your assets in an irrevocable trust, you lose ownership of the assets. The assets are no longer under your control. Hence, creditors cannot sue you for repayment using assets from an irrevocable trust. The assets also receive protection in case you experience lawsuits or bankruptcy.
Estate planning
Placing your assets in an irrevocable trust aids estate planning. You can divide your assets and appoint beneficiaries according to your will. In addition, assets in an irrevocable trust receive tax benefits.
Privacy
Irrevocable trusts do not go through probate court. Hence, the terms of your trust will remain private.
Management
If you have any medical conditions that can affect your judgement and you are worried about managing your assets, setting up a trust can help with the situation. You can appoint a trusted person as the beneficiary. After you sign the trust over to the beneficiary, he will have complete control over the assets. Hence, it will help in proper management.
No Probate
An irrevocable trust does not go through probate court. This benefit can save a lot f time and expense for all parties involved in the trust.
Can give to Charity
You can set up an irrevocable trust with instructions to send money to charities regularly. Setting up irrevocable trusts for charitable purposes also provides tax benefits.
Continuity
You can set up an irrevocable trust and include terms, which allow the beneficiaries to receive money regularly. This will help to provide for them throughout their lives. This option is especially beneficial if you have any relatives with disability issues.
Cons of an irrevocable trust
Inflexibility
An irrevocable trust is unchangeable. The grantor cannot appoint different beneficiaries or change the conditions of asset distribution.
Less Control
Once the grantor signs the irrevocable trust, he gives up rights to the assets. He loses his control over the assets.
Complex
The process of creating and setting up an irrevocable trust is complex. You will require the help of an experienced lawyer.
Expensive
The entire process of setting up an irrevocable trust costs money. You have to pay lawyer fees and any other legal fees.
Limited Access
Once you sign off your assets into an irrevocable trust, you are no longer the owner. Even if later in life you wish to use those assets, you cannot regain control over them.
Administrative Cost
Maintaining an irrevocable trust requires money. Hence, it is expensive to maintain an irrevocable trust.
Tax Implications
Irrevocable trusts are subject to gift taxes. Therefore, when you gift some of your assets to another using an irrevocable trust, the assets will get taxed. Hence, there will be fewer assets by the time the beneficiary receives them.
Not Customizable
An irrevocable trust is fixed. The grantor cannot customise the trust conditions after it goes into effect.
Main Differences Between Revocable Trust and Irrevocable Trust (in Points)
- A revocable trust is flexible and subject to change. In contrast, an irrevocable trust is not subject to change.
- The grantor maintains control over a revocable trust. In an irrevocable trust, the grantor loses control over the assets.
- A revocable trust does not offer protection from creditors. An irrevocable trust offers protection from creditors.
- The grantor has to pay taxes for income from assets in a revocable trust. An irrevocable trust offers tax benefits.
Conclusion
In short, you have many options when setting up a trust. Two of them are revocable trust and irrevocable trust. If you want to retain control over the assets during your lifetime, then set up a revocable trust. It offers more flexibility and is customisable. However, if you wish to relinquish control over your assets, then setting up an irrevocable trust is the better option. You cannot make changes after you sign the trust and it goes into effect.
