People create trusts for many reasons. Sometimes they want to protect their assets later in life. Sometimes they want to ensure they are properly distributed to their beneficiaries after they pass away. At other times, trusts are used to gradually distribute assets to them over time, providing a type of income to a minor or a person who is generally incapable of providing for themselves or managing their money.
There are many types of trusts a grantor can create, and two of the major types are revocable trusts and irrevocable trusts. What’s the difference between an irrevocable trust and a revocable trust? They both operate differently and have their benefits and drawbacks.
What is a Revocable Trust?
A revocable trust is a living trust that allows for changes to be made to it by the grantor. Assets can be added to the trust, and they can also be removed. The grantor can also change the terms and conditions regarding how assets are handled and transferred as well as add or remove beneficiaries. It is a flexible way for a person to manage their trust throughout their life, including later in life. The only requirement for the grantor altering the trust is for them to be legally competent. Revocable trusts are also not subject to probate.
Some grantors choose to name themselves. If this is a choice that the grantor makes, they should choose a successor trustee who can take on the duty of managing and distributing the assets after the grantor passes away or becomes incapacitated. Once the grantor passes away, the trust becomes irrevocable.
While many people choose to create and manage a revocable trust because of its flexibility, there are a few drawbacks to these types of trusts:
- They are tax neutral, meaning they will be subject to state and federal taxes, including estate taxes.
- They are not immune to financial judgments, creditors, etc. The assets can be liquidated to settle lawsuits.
What is an Irrevocable Trust?
An irrevocable trust is a “set in stone” trust that cannot be changed after it is created, at least not easily. The assets, beneficiaries, and terms of the trust are generally fixed and can only be changed by a court order or by 100% agreement between the beneficiaries.
Why would a grantor want to create an irrevocable trust when revocable trusts are much more flexible? Irrevocable trusts have a few benefits that make them more attractive to some grantors:
- Since they are immune from state and federal taxes, they can be used to reduce the tax burdens of an estate.
- Since they are considered separate assets, they can be immune from creditors and judgements made by the court. It’s generally rare for a creditor to gain access to a person’s irrevocable trust, as it provides significant legal hurdles for them to do so.
Many grantors choose irrevocable trusts if they are trying to reduce the tax burden of their estate or if they are later in life and do not plan to change the terms of their estate after it is made.
Make sure to work with your attorney to decide which type of trust is best for your estate and its beneficiaries.
Bonds for Trusts and Estates
When a trustee is named to oversee a trust or an estate, they are generally required by the courts to obtain a trustee bond. These types of surety bonds provide protection for the beneficiaries of a trust in the event the trustee does not administer the trust according to its instructions.
If you need a bond for your estate, get in touch with the surety agents at The Patrick J. Thomas Agency today.
Disclaimer: this is for informational purposes only and is not intended to be legal advice. If you need legal counsel, please contact an attorney directly.