A trust may be either revocable or irrevocable. With a revocable trust, the grantor retains full control of the assets placed in the trust, may remove them from the trust, change the beneficiaries, and cancel or revoke the trust entirely.
With an irrevocable trust, the grantor gives up control of the trust and its assets.
Once the ownership of an asset is transferred to the trust, the grantor may not remove it from the trust. The grantor may also not change beneficiaries, modify any of the terms of the trust, or revoke it.
Irrevocable trust advantages:
Because assets placed in an irrevocable trust are no longer the property of the grantor, an irrevocable trust can, for example, allow the grantor to overcome the Medicaid income requirement. Irrevocable trusts can also protect and preserve property that might otherwise be lost to creditors. Several types of irrevocable living trusts are specifically designed to avoid or reduce state and federal estate taxes. For example, AB, bypass, or Qualified Terminal Interest Property (QTIP) trusts are used by spouses to delay taxes until the second spouse dies. Generation-skipping trusts offer similar advantages (subject to the generation-skipping tax) by delaying taxes until the grandchild (as opposed to the child of the grantor) dies.
Other irrevocable trusts that offer potential tax advantages include the following:
Charitable trust. With a charity as a beneficiary, the grantor chooses someone to receive income during his or her life, and upon that person's death, the trust property goes to the charity.
Grantor retained income trust. This trust allows the grantor to receive income from trust property for a specified period of time. To be effective in delaying taxes, however, the grantor must live past the specified period.
Qualified personal residence trust. The grantor transfers title of his or her home to the trust but retains the right to live in the home rent-free for a specified period of time. At the end of the period, the home goes to the designated beneficiaries.
Life insurance trust. The trust owns a life insurance policy on the grantor. Since the proceeds of the policy do not go to the grantor's estate, they are not taxable. Such a trust must exist for at least three years before the grantor's death. If a previously owned policy is transferred to the trust, the trustee cannot be the prior policy owner.
An irrevocable living trust can have benefits for both the wealthy and those of modest means. Because creating irrevocable trusts can have long-lasting and serious consequences for you during your lifetime as well as for your estate, you should seek professional advice if you are interested in establishing an irrevocable trust.
The main difference between a revocable and irrevocable trust is that:
A revocable trust can be changed at any time if the grantor is of sound mind, and an irrevocable trust cannot be changed.
A revocable trust is often used for estate planning but offers little to no asset protection, while a properly drafted irrevocable trust can offer substantial asset protection.
A revocable trust is also known as a living trust, while an irrevocable trust cannot be modified after it is created without the beneficiaries' consent.
Steven D. Swant, P.C. has prepared, executed and amended a great number of revocable and irrevocable trusts, along with Advance Health Care Directives, Powers of Attorney and Pour-over Wills.