Creation of a will and avoiding a messy inheritance equation are two things that weigh on the minds of individuals approaching the twilight years of life. It's essential that the different legally feasible ways of transferring assets be considered. The standard procedure of creating a will invites a costly legal procedure called 'Probate' that verifies whether the will's genuine. One way out is the creation of a revocable or irrevocable trust. Both provide a legal escape route for your beneficiaries to go through the probate procedure and simplify your inheritance plan.
Before we go ahead, let it be known that this article is only for reference purpose and the details of laws regarding revocable and irrevocable trusts are subject to change from state to state in the USA.
What is a Revocable Trust?
A revocable trust is one way of transferring your assets into a trust, without relinquishing your control over them and avoiding the probate complications that occur in case of a will. It's also known as a revocable living trust. It's mandatory that a grantor (Creator of the trust) must appoint a trustee, a disability trustee and beneficiaries, as part of the agreement. The grantor himself can be the trustee and control the assets allocated to the trust, while he or she is alive. In case, the grantor, who is also the trustee, suffers from mental disability, the disability trustee takes control over the assets.
After the death of grantor, the trust gets converted into an irrevocable trust and the person who succeeds as the new trustee receives the instructions to transfer the assets to beneficiaries. There is no need for a probate after the death of the grantor, as he no longer holds control over the assets. While the grantor lives, his assets are subject to taxes imposed by the federal government.
What is an Irrevocable Trust?
An irrevocable trust, as its name itself suggests, is an agreement made by an individual to relinquish control over his assets and transfer them to a trust forever. No changes can be made in such a trust agreement, once it's made. The grantor must appoint a trustee and name beneficiaries as part of the agreement. The trustee gets sole control over the assets and is provided with instructions on how to distribute assets to the beneficiaries on the death of the grantor. In this case too, there is no need for a probate as the grantor holds no control over the assets. For any change to be made in the agreement, all the people that are a part of the trust, need to give the go ahead. The grantor can make no change in it, on his own.
The prime difference between the two types of trusts lies with respect to asset control. In revocable trusts, a grantor holds control over the assets by naming himself as a trustee and holds the right to change the agreement, anytime he or she feels like. On the contrary, in an irrevocable trust, the grantor relinquishes the sole right to make changes. Only a unanimous vote, from the trustee and beneficiaries can change agreement details.
Unlike the revocable trust, the grantor who signs an irrevocable trust, is no longer liable to taxes imposed on the assets under the trust. An irrevocable trust also provides asset protection which the revocable one doesn't.
Your lawyer is the best source of information, whom you can consult regarding the finer details of opting to transfer your assets into a trust. As discussed before, an irrevocable trust saves your beneficiaries from the estate tax, which would be normally imposed on an asset in a revocable trust. However, it comes at the cost of relinquishing control over those assets over your lifetime.
Opting for a revocable trust is the right decision for young individuals, still in the prime of their life, while going for a irrevocable trust makes sense for senior citizens. Still, it is difficult to predict which would be the right choice, without the knowledge of the inheritance equation for an individual and the nature of his assets. Consult your lawyer regarding the benefits and pitfalls of opting for both the trust types, according to your state laws. Carefully weigh the pros and cons of both - an irrevocable trust and revocable trust, before making your decision.