A trust is an ideal way for individuals to transfer assets either during life or after their passing. At a basic level, a trust is a separate legal entity created to hold certain assets. Once these assets are placed in the trust, they are managed by the trustee.

The trust document instructs the trustee on how to manage the trust assets and distribute them to beneficiaries. Individuals and families often use trusts for estate planning purposes, such as to avoid probate, minimize estate taxes, and seamlessly transfer intergenerational wealth. 

Let’s take a look at revocable and irrevocable trusts and the advantages and disadvantages of each:

Revocable Trusts

A revocable trust, also known as a living trust, is a lifetime trust that can be amended or revoked at any time during the creator’s life. The creator (or grantor) of the trust typically also serves as a trustee and beneficiary during their lifetime. When the grantor passes away, the terms of the revocable trust direct how their assets will be distributed, acting as a substitute for a will.

What are the advantages of a Revocable Trust?

  • Allows for asset management during periods of disability: If the grantor becomes incapacitated for any reason, the successor trustee can manage assets held by the trust. The trustee may also use the trust assets to pay for the grantor’s expenses during this period of disability.
  • Streamlines asset management after death: The successor trustees of the revocable trust will have immediate access to assets held by the trust when the grantor dies. This accelerates the process of asset distribution. In addition, assets held in the continuing trust created under the revocable trust agreement are not subject to court oversight during the trust’s ongoing administration.
  • Avoids probate: Assets transferred to the revocable trust during life avoid probate at death. The advantages of avoiding probate will vary from state to state, depending on how costly or burdensome the probate court requirements are in the grantor’s state and county of residence. Furthermore, as opposed to revocable trusts, continuing trusts created under a person’s will are subject to court oversight during the trust’s administration. 
  • Offers privacy: Unlike wills, the provisions of revocable trusts generally do not become a matter of public record during probate proceedings. This allows individuals to arrange for the disposition of their assets outside of the public eye.

What are the disadvantages of Revocable Trusts?

  • Lacks tax savings: Even though the assets transferred into the revocable trust are out of the grantor’s probate estate, their value is included in the grantor’s taxable estate. For tax purposes, all assets are treated as if the grantor owned them outright.
  • Lacks asset protection: Because the grantor retains the power to revoke the trust, a revocable trust does not insulate the trust assets from the claims of any potential creditors of the grantor.

A revocable trust provides many advantages, but it may not be appropriate for everyone. Make sure to speak to an experienced estate planning attorney who can help you decide whether a revocable trust suits your circumstances.

Irrevocable Trusts

Unlike a revocable trust, an irrevocable trust cannot be updated, changed or amended without consent from the grantor’s beneficiaries, except in rare circumstances. With irrevocable trusts, the grantor typically loses all rights of ownership to the trust’s assets.

What are the advantages of an irrevocable trust?

  • Minimizes estate taxes: Property moved to an irrevocable living trust, if treated as a completed gift for federal gift tax purposes, is not included in the grantor’s taxable estate at death. This helps lower the estate tax liability of large estates.
  • Provides asset protection: This is especially helpful for those in professions more prone to lawsuits, such as medical professionals or attorneys. If assets are transferred to the irrevocable trust prior to any potential claims, the trust provides some protection from the grantor’s creditors.
  • Protects assets from misuse: To avoid beneficiaries misusing the trust’s assets, a grantor can dictate stipulations for its distribution and withhold distributions if the beneficiary has creditors, gambling issues, or substance abuse issues.

What are the disadvantages of an irrevocable trust?

  • Features a complicated setup: Irrevocable trusts can be complex and expensive to set up.
  • Offers less flexibility than a revocable trust: An irrevocable trust’s terms are inflexible and typically cannot be changed without permission from the grantor’s beneficiary or beneficiaries, or another method such as decanting to a new trust.

Start Planning for Your Family’s Future

There are many variables to consider before setting up a trust. Are you ready to start planning for your family’s financial future? Get started today. For more information on creating trusts, read our blog. Also, download our whitepaper, What to Consider When Creating A Trust.

 

Wealthspire Advisors is a registered investment adviser and subsidiary company of NFP Corp.
This document is not intended to constitute legal, tax or accounting advice. Any communication from Wealthspire is not a substitute for obtaining legal, tax or accounting advice from a qualified attorney, tax or accounting advisor. You should not act or refrain from acting upon any such information without first seeking the advice of qualified legal counsel, tax or accounting advisor with respect to your specific situation. Certain Wealthspire employees may be licensed to practice law; however, these employees do not provide legal services to any of Wealthspire Advisors’ clients, and no corresponding attorney/client relationship is established.