Weighing the Pros and Cons of Revocable vs Irrevocable Trusts
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A key aspect of estate planning is your trust. How you decide to structure it can make all the difference. A trust allows a third party (a trustee) to manage assets on behalf of a trust fund’s beneficiary.
You don’t have to be wealthy to create a trust. Trusts are for families of all economic backgrounds and offer a range of benefits depending on how it’s structured.
They typically minimize the frustrations or fees that may fall on your family members with a traditional will — helping simplify the uncomfortable task of dividing assets and settling your estate when you die. Your assets are undoubtedly important to you and will one day be passed on to your loved ones. A trust can help ensure you and your beneficiaries reap the rewards of your estate.
When deciding between a revocable or irrevocable trust, it’s essential to weigh the pros and cons of each.
What Is a Revocable Trust?
You are the grantor, trustee and primary beneficiary in a revocable trust — meaning you maintain control over your assets and benefit from the trust during your lifetime. A revocable trust, otherwise known as a living trust, continues after death through the intended beneficiaries named in the trust.
Pros of Revocable Trusts:
You can change the trust agreement as you wish, like adding/removing beneficiaries. This is what makes it “revocable.”
Any assets that are secured by the trust are not subject to a review by a probate court. You have control over what happens to your assets even after you die.
In the event of incapacitation or death, you can name a successor who is bound by the trust’s terms to carry out your wishes. For example, if you want funds to be released at a certain time in a beneficiary's life, the successor sees that it is done.
Cons of Revocable Trusts:
It usually takes more time and money to set up a trust than it would to write a will.
If you neglect to move new assets into the trust, it will only be partially funded. In most cases, you would also be required to create something called a “pour-over will.”
Beneficiaries have more time to challenge a trust. It usually depends on state-specific statutes of limitations that last anywhere from one to five years.
What Is an Irrevocable Trust?
You are the grantor in an irrevocable trust, but you will need to name a trustee and at least one beneficiary. As the grantor, you decide the terms and uses of the trust, but you must be in agreement with your trustee and beneficiary. The minute you transfer an asset into an irrevocable trust, the trust becomes the legal owner — meaning the assets no longer belong to you.
Pros of Irrevocable Trusts:
Your assets are protected from misuse or creditors. Distribution conditions in an irrevocable make it less likely that the beneficiaries will mishandle their inheritance.
Removing taxable assets from your estate and placing them in an irrevocable trust lowers your tax liability and minimizes the burden of estate taxes.
You are protected against lawsuits because the trust is the legal owner of the assets. This is an ideal situation for professionals like attorneys or doctors who might be more vulnerable to lawsuits.
Cons of Irrevocable Trusts:
You lose ownership of all assets you transfer into the trust. Once you set up an irrevocable trust and sign on the dotted line, your control over your money, property, investments or life insurance policies is limited.
In order to make a change, you must have approval from the trustee and beneficiary. In some cases, you may not be able to revoke the terms without a court order.
A court can reclaim your assets if it feels you transferred funds to the trust in preparation for a predicted lawsuit. Some states require that assets be in a trust for a certain amount of time before they are legally protected.
Plan for Your Future with Fullerton Financial Planning
Our team at Fullerton Financial Planning is here to help you invest in your future. Reach out to us today to learn more about trusts and what might work best for you. Call us at 623-974-0300 to schedule an appointment.