Most individuals opt for a revocable trust when preparing an estate plan. However, an irrevocable trust comes with some advantages that revocable trusts do not. So, what’s the difference between the two?
It’s important to note that trusts in general allow one to avoid probate in relation to the property held in the trust, allowing one to protect property and save money and time. The probate process can be complicated and lengthy, and navigating probate court can be difficult, so this is often a factor that draws people to trusts.
The fundamental difference between the two types of trusts is that a revocable trust, as its name suggests, can be revoked or amended during the lifetime of the person who created it. On the other hand, an irrevocable trust cannot be easily amended or revoked. Given the obvious benefit to being able to change the terms of a revocable trust, why would anyone ever want an irrevocable trust instead?
For starters, depending on how the irrevocable trust is set up, the irrevocable trust could provide some asset protection. In other words, if the irrevocable trust is set up correctly, it could make it difficult for creditors to reach those assets. On the other hand, assets in a revocable trust can be easily reached by creditors.
There may also be tax advantages to setting up an irrevocable trust. For example, estate taxes, may not apply to assets placed into a properly set up irrevocable trust, thus reducing the size of an individual’s estate for estate tax purposes. Similarly, if the assets are placed into an irrevocable trust with a charity as a beneficiary, the individual may be eligible for a charitable income tax deduction with respect to those assets.
While there are some advantages to setting up an irrevocable trust, they are not for everyone, and a decision to form one should not be taken lightly. Careful consultation and competent legal counsel is necessary before making a decision on what type of trust to set up.