What Is the Difference Between a Revocable Trust and an Irrevocable Trust?
You may know that a trust is a highly effective estate planning strategy, but do you know the difference between a revocable trust and an irrevocable trust? Depending on your lifetime financial needs and your estate planning priorities, a revocable or irrevocable trust may be the right option for you. Here is what you need to know to get started with your trust-based estate planning.
What’s the Difference Between a Revocable and an Irrevocable Trust?
A trust is a legal entity created and funded by a person (or couple) – called the grantor – as part of their estate plan. The trust is managed by a trustee. The trustee’s job is to manage the assets placed into the trust, and use the funds and property in the way designated by the grantor. Trusts can be used to:
- Provide for the grantor and their spouse during their lifetime,
- Shelter assets for people receiving government assistance
- Remove assets from formal probate proceedings
- Leave assets to loved ones after the grantor’s death
- Place conditions on how inheritances are earned and spent
- Donate funds to charity or causes the grantor supports
There are various types of trusts that can be used in different circumstances. However, they each are either a form of revocable or irrevocable trust. Knowing the difference is essential to choosing the state planning strategy that best suits your needs.
What is a Revocable Living Trust?
A revocable trust is created and funded while the grantor is still alive. Often, the grantor is the trust’s first trustee, managing their own affairs and preserving and increasing the trust’s assets. The grantor retains the right to modify the trust by:
- Adding or removing trust assets
- Changing beneficiaries
- Modifying the trust documents regarding asset distribution
- Revoking the trust entirely
When a grantor dies or becomes legally, mentally, or physically unable to manage their own affairs, a successor trustee can take over trust administration, using the assets for the grantor’s care during their lifetime, When the grantor dies, the trust becomes irrevocable, and the trustee’s role transitions to distributing the trust assets according to the trust documents as written and modified by the grantor.
What is an Irrevocable Trust?
The difference between a revocable trust and an irrevocable trust is in the grantor’s ability to make changes to the assets in the trust after it is established. In an irrevocable trust, the grantor relinquishes ownership of the assets to the trust itself. Once the property or funds go into the trust, they cannot be withdrawn, except according to the terms of the trust. In addition, the grantor cannot act as their own trustee. So funds transferred into an irrevocable trust are no longer under the grantor’s control.
Revocable vs Irrevocable Trust: Which Do You Need?
Both revocable and irrevocable trusts can help your loved ones avoid probate and give them access to your assets after your death. However, there are significant differences in the way the Maryland probate courts and the IRS treat revocable and irrevocable trusts.
Revocable Trusts Offer Flexibility
The benefit to choosing a revocable living trust is that the grantor retains control over the trust and its assets. This flexibility allows you to place assets in the trust while still relying on them for your own lifestyle and support. If major life changes occur – such as a divorce, birth of a new grandchild, or downturn in the family business – you can make changes to your revocable trust to adapt to those changes. You can even revoke the trust entirely and regain full control over all your assets. This makes a revocable trust idea for healthy, professional adults looking to prepare for the future without limiting their options.
Irrevocable Trusts Offer Asset Protection
The grantor of a revocable trust retains ownership of the assets in that trust. That means that your creditors and tax officials can seek to collect from assets held in a revocable trust. But in an irrevocable trust, the trust itself owns the assets, not the grantor. That allows the irrevocable trust to offer asset protection, placing the funds beyond the reach of creditors or the IRS. In Maryland, estate taxes apply to estates exceeding $5 million at the time of death. If you have a large estate, separating yourself from some of your assets using an irrevocable trust can reduce your family’s estate tax burden and leave them larger inheritances after you are gone.
Choose Between Revocable and Irrevocable Trusts with the Help of an Experienced Maryland Probate Attorney
If you want to craft an estate plan that makes the most of your assets and honors your wishes, it’s vital to have the representation of a knowledgeable probate attorney to help decide whether a revocable or irrevocable trust is right for you. The Law Office of Henry Nash provides adept counsel for probate and a wide variety of estate matters in Maryland, and can help you create an estate plan that balances asset protection and flexibility. Contact us online or call (301) 681-6274 to schedule a consultation at our Rockville Office.
