Living trusts can be a great option for distributing your assets after your death. If you’re thinking of creating a trust as part of your estate plan, you’ll want to learn the differences between a revocable living trust and an irrevocable living trust so you can make the best decision as to which one is right for you.
What Is a Living Trust?
Before moving on to the distinctions between revocable and irrevocable trusts, it is important to note that both trusts are an “inter vivos” trust: a living trust so named because you create it while you’re still alive.
A living trust is a written legal document through which your assets are placed into a trust for your benefit during your lifetime and then transferred to designated beneficiaries at your death by your chosen representative, called a "successor trustee."
To get the most benefit out of a trust, you should make sure everything you own is held in trust form. No assets become a part of the trust without specific inclusion, so it is important that you revisit your trust provisions from time to time to ensure all of your assets are included.
Now you are ready to move on to whether you want to make your living trust revocable or irrevocable.
Revocable Living Trust vs. Irrevocable Living Trust
With a revocable living trust, the person creating it can later change his or her mind regarding not only the property placed into it but also the existence of the trust itself.
Some of the benefits of a living revocable trust include the following:
1. Avoids probate, which can mean a faster distribution of assets to your heirs.
2. Potential money savings, though this depends on your financial situation, and remember it does cost something to set up a trust on the front end.
3. More privacy than a will, whose provisions are made public after your death; a living trust's provisions are kept private.
4. Ability to choose someone to manage your affairs without court intervention should you become incapacitated. Also, since the trust is revocable, if you dispute your incapacity, you can retain control yourself.
An irrevocable trust, on the other hand, is just as it sounds—not revocable. That is, once you put property into it, you cannot retrieve it as it belongs to the trust. Accordingly, this property is not included in your estate’s value for estate tax purposes. This is one big potential benefit of an irrevocable trust, although if your total estate value falls under the federal estate tax exemption, this probably isn’t a concern for you anyway.
Final Living Trust Considerations
Remember that when you establish trusts, be aware of any potential tax consequences (gift, estate, and state inheritance) involved with property transfers, and note that you should always have a pour-over will to catch any assets that didn’t make it into the trust or your last will and testament.
Now that you know the differences between the two types of living trusts, you’re ready to move on to the next step in creating your estate plan.