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Understanding the Differences Between Revocable and Irrevocable Trusts

Adding trust instruments to your estate plan can help a surviving spouse and other beneficiaries have access to assets while the rest of the estate is wound up. Especially if there are young children or children with special needs ensuring continuity of financial security to survivors is at the forefront of individuals making end of life decisions. There are many types of trust instruments, such as a marital “A” trust or a bypass “B” trust. These trusts can also be revocable and irrevocable.

 

Revocable or living trusts

A revocable trust permits the passing of assets outside of probate, the legal proceeding that winds up and settles the estate of the deceased person. Also known as a living trust, you (the grantor) are able to retain control of the assets during your (the grantor’s) lifetime. A living trust is flexible. They can be dissolved at any time should you wish to change the beneficiary or you yourself need access to the trust assets for any reason. Once you (the grantor) dies, the living trust becomes irrevocable. A living or revocable trust is subject to estate taxes, unlike an irrevocable trust. Lastly, you are able to name yourself the trustee or co-trustee and retain complete ownership and control over all of the trust assets during your lifetime.

 

Irrevocable trusts

An irrevocable trust places assets designated by you into a trust and then transfers those assets out of your estate to a designated beneficiary. For the most part these assets are out of the reach of estate taxes and the probate process. However, the assets you transfer via this type of trust instrument is irrevocable, meaning it cannot be changed by you (the grantor) after it has been executed. Once the trust is created, you lose all owner and control over the trust assets. You will no longer be able to make changes to any trust terms, cannot dissolve the trust, and no longer have legal assets to any of the trust capital or its income or proceeds.

 

Losing control of assets during your lifetime is a difficult decision. You must carefully weigh the tax benefit of such a transfer when establishing an irrevocable trust. In addition to avoiding estate taxes and the probate process, you may also protect such assets from a legal judgment against you. This may be quite advantageous for professionals or professions that subject a practitioner to malpractice claims, like accountants, doctors, architects, and lawyers.

 

Deciding on the best trust instrument for you

The final step in understanding the differences between revocable and irrevocable trust is consulting with a NY trusts and estates lawyer. Every state has its own laws relating to trusts surrounding all aspects of the trust – creation, modification, and termination. Consult a NY trusts and estates lawyer before making any decision about a trust. Any mistake at formation of trust instruments may invalidate it and subject your beneficiaries to the probate process or estate taxes. 

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