Revocable vs Irrevocable Trust
A trust is referred to as an agreement that legally stipulates how people’s assets and wealth are to be managed. A trust that is set up to manage such assets is also valid after a person’s death. It is important to understand the different types of trusts before moving one’s financial resources and assets to a trust. While both revocable and irrevocable trusts are created with the basic aim of holding and protecting one’s assets, there are a number of major differences between revocable and irrevocable trusts.
What is a Revocable Trust?
A revocable trust (a.k.a. living trust or inter vivos trust) is a trust created by a person with the aim of holding his assets and retaining control of his financial resources such as property, personal assets, business assets, funds and investments during his life, and after his death. A revocable trust, as its name suggests allows the person who creates the trust to dissolve or to make amendments to the terms of the trust at any time. The beneficiaries of a revocable trust do not have any legal rights over any of the assets held by the trust, and the beneficiaries can be changed at any time depending on the preferences of the trust’s creator. However, once the grantor of a revocable trust dies the trust becomes an irrevocable trust, and all features of an irrevocable trust then apply. A revocable trust is not considered as a separate legal entity from the grantor (creator) of the trust and, therefore, treated as the grantor’s property when calculating income and estate tax. One of the main advantages of creating a revocable trust is that the grantor can avoid costly and time consuming probate process.
What is an Irrevocable Trust?
One cannot change an irrevocable trust in any way once it is created without the consent of a number of parties including the beneficiaries of the trust, the trustee, and sometimes the court. The beneficiaries of an irrevocable trust have enforceable rights to the assets held by the trust. As a result, an irrevocable trust is more permanent in nature, and the movement of funds and assets from the ownership of the grantor to the trust is permanent. Irrevocable trusts are used for estate planning, transferring life insurance proceeds, ensuring that assets are used for a predetermined specific purpose, providing financial protection to the trust’s beneficiaries, etc. An irrevocable trust is considered as a separate entity and, therefore, the trust can be created in a manner in which the income tax is charged on the trust itself.
Revocable vs Irrevocable Trust
Revocable and irrevocable trusts both offer the grantor a legal instrument that stipulates the manner in which these assets are to be held and managed. There are, however, a number of differences between the two. The grantor can change the terms of a revocable trust during his lifetime. However, the grantor cannot change the terms of an irrevocable trust without the permission of the beneficiaries, trustee and sometimes the court. In a revocable trust, the assets are not safe from creditors; however in an irrevocable trust, assets cannot be seized by the grantor’s or beneficiary’s creditors. Revocable trusts are charged income and estate tax on the grantor, whereas for an irrevocable trust the taxes are charged on the trust itself. One of the main benefits of both revocable and irrevocable trusts is that the grantor is able to avoid costly and time consuming probate process.
What is the difference between Revocable and Irrevocable Trust?
• A trust is referred to as an agreement that legally stipulates how people’s assets and wealth are to be managed. It is important to understand the different types of trusts before entrusting one’s financial resources and assets to a trust.
• A revocable trust, as its name suggests allows the person who creates the trust to dissolve or to make amendments to the terms of the trust at any time.
• One cannot change an irrevocable trust in any way once it is created without the consent of a number of parties including the beneficiaries of the trust, the trustee and sometimes the court.