Trusts Explained: Revocable vs. Irrevocable

Creating a trust is a powerful way to help manage and protect your assets. Both irrevocable and revocable trusts offer distinct benefits. Let’s explore how each type works and the differences between the two.

Before we get into the details, it is crucial to understand the key terms associated with trusts in general:

• Grantor: The person who creates the trust.
• Trustee: The individual or entity responsible for managing the trust’s assets.
• Beneficiaries: The people or entities who will receive the assets from the trust.

What Exactly is a Revocable Trust?

Think of a revocable trust as a rulebook for your assets. It is a legal arrangement in which you, as the grantor, transfer ownership of your assets to the trust.

Typically, a revocable trust is set up through a legal document, either a separate trust document or as part of a will. This document outlines the terms of the trust, including the appointment of the trustee and a successor trustee, how the assets are to be managed and distributed, and any other specific instructions or conditions you wish to impose.

Often, the grantor names themselves as the initial trustee, allowing them to stay in control of their assets during their lifetime. This flexibility means you can modify or even revoke the trust anytime during your lifetime, provided you are mentally competent. Whether you are welcoming a new family member, changing financial status, or adapting to new tax laws, a revocable trust allows you to keep your estate plan up to date.

So, what happens after the grantor’s lifetime? The successor trustee named in the trust document steps up to manage the trust according to the grantor’s instructions. This helps ensure the grantor’s assets are distributed according to their wishes.

Why Create a Revocable Trust?

There are several benefits to creating a revocable trust:

1. Maintain Control of Your Assets: If you create the trust and name yourself the trustee, you maintain complete control over your assets. This means you can manage, invest, or dispose of these assets as you see fit during your lifetime.
2. Set Rules for The Distribution of Your Assets: You can establish specific rules for how and when the assets will be distributed to the beneficiaries. This is particularly useful if you want to protect younger or less financially savvy beneficiaries.
3. You Can Avoid Probate: Probate is a legal procedure required to validate a will and distribute the decedents’ assets. One of the most significant advantages of a revocable trust is that it helps avoid this probate process, which can be long, expensive, and public. For example, probate can take six months or longer in Alabama. Additionally, during probate proceedings, the details of the decedent’s estate become a matter of public record. On the other hand, a revocable trust allows you to have a more private and efficient transfer of assets, bypassing the probate process altogether.

What Exactly is an Irrevocable Trust?

Like a revocable trust, an irrevocable trust is a legal document that gives a trustee the authority to manage and make decisions about the assets placed within the trust. The setup involves detailed legal documentation to ensure that all terms and conditions are clearly outlined and legally binding.

However, as the name suggests, once you establish an irrevocable trust, it cannot be changed or revoked. This permanence is what sets an irrevocable trust apart from a revocable trust. Since it’s a permanent decision, it’s essential for you to carefully consider it, fully comprehend the specifics, and seek professional advice

Why Create an Irrevocable Trust?

1. Minimize Estate Taxes: One of the most compelling reasons for establishing an irrevocable trust is to reduce estate taxes. When you transfer your assets into the trust, you effectively remove them from your taxable estate. This can lead to substantial tax savings, especially if you have a high net worth.
2. Protection from Creditors and Lawsuits: Holding your assets in an irrevocable trust generally protects them from creditors and legal judgments against you. This provides a layer of security. The assets designated for beneficiaries in the trust are safeguarded against your potential financial liabilities.
3. Maintain Eligibility for Government Benefits: If you are seeking to qualify for certain government benefits, such as Medicaid, an irrevocable trust can be a strategic tool. By placing assets in the trust, you may be able to reduce your countable assets. This can help you maintain eligibility for these benefits without having to deplete your resources entirely.

Conclusion

Both revocable and irrevocable trusts offer distinct advantages and considerations, and there is no one-size-fits-all solution. Like many other aspects of estate planning, creating a trust involves many factors. The decision between these two types of trusts depends on your unique circumstances, financial situation, and estate planning goals.

To make the best choice for your specific circumstances, it can be helpful to consider all the factors involved and seek professional guidance. For personalized advice tailored to your needs, contact our team today. We are here to help you navigate the complexities of your unique financial journey.

For more helpful content delivered directly to your inbox, sign up for our newsletter at the bottom of the page.

Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC [“Welch”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch’s current written disclosure and Form CRS (Customer Relationship Summary) discussing our advisory services and fees is available for review upon request or at www.welchgroup.com.  Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.