Revocable vs. Irrevocable Trusts

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What is the Difference Between a Revocable and an Irrevocable Trust?

A trust is a collection of assets (something of value).

Revocable Trust—a trust that can be changed.

Irrevocable Trust—a trust that cannot be changed.


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Components of a Trust

  • Grantor—The person who creates the trust and deposits assets into the trust. Also called the “trustmaker.”
  • Beneficiary—The person(s) who benefits from the trust, who either receives ownership of assets in the trust or income from them depending on the type of asset.
  • Trustee—The person who administers the trust. The trustee is chosen by the grantor. The grantor and trustee are often the same person in a revocable trust.
  • Assets—Whatever property is deposited into the trust. This can be cash, real estate, stocks, bonds, art, jewelry, or anything else with financial value.

Irrevocable Trusts

Irrevocable trusts are only for people who are very sure about what assets they want to give and to whom.

  • Terms cannot be changed
  • Assets put into an irrevocable trust cannot be removed
  • Grantor cannot change the beneficiary or trustee
  • Assets are no longer part of the grantor’s estate
  • Grantor no longer owns them
  • Not included on the grantor’s tax return
  • Beneficiary must pay income taxes on distributions
  • Protected from the grantor’s creditors

Revocable Trusts

Revocable trusts, also referred to as living trusts, can be used for a number of reasons and are much more flexible.

  • Terms can be changed anytime before the grantor’s death
  • Grantor can select a new beneficiary or trustee
  • Assets can be managed and changed by the grantor
  • Assets are still part of the grantor’s estate
  • Grantor retains ownership and control
  • Grantor must still claim assets on tax return
  • Can be claimed by creditors

Uses

Most people can meet their financial needs with a revocable trust, but irrevocable trusts may be more useful in certain situations:

*Note that revocable trusts convert to irrevocable trusts after the death of the grantor.

Taxes


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In addition to the income tax consequences stated above, a few other tax issues should be kept in mind:

Gift Tax

  • You may have to pay a gift tax on any assets deposited into an irrevocable trust.
  • In general, you can only deposit up to $14,000 per beneficiary, per year, into an irrevocable trust without incurring a gift tax.
  • The most you can deposit over the course of your lifetime without incurring a gift tax is $5 million.
  • If you die within three years of transferring your life insurance policy into an irrevocable trust, the IRS disregards the transfer, and the amount of your policy is included in your estate for tax purposes.

References

  1. https://www.thebalance.com/revocable-vs-irrevocable-trusts-3505386
  2. http://irrevocable-trust.ultratrust.com/top-7-differences-between-irrevocable-trust-and-revocable-trust.html
  3. http://www.investopedia.com/ask/answers/062215/what-difference-between-revocable-and-irrevocable-intervivos-trusts.asp
  4. http://money.usnews.com/money/personal-finance/mutual-funds/articles/2014/06/19/how-to-choose-between-a-revocable-and-irrevocable-trust
  5. http://www.bankrate.com/finance/estate-planning/living-revocable-trust-facts-6.aspx
  6. http://  www.forbes.com/sites/ashleaebeling/2015/10/22/irs-announces-2016-estate-and-gift-tax-limits-the-10-9-million-tax-break/#2f38e9116a7c
  7. http://www.waltshurdenlaw.com/blog/will-you-pay-gift-tax-on-assets-placed-in-irrevocable-trust-.cfm
  8. https://www.thebalance.com/living-vs-revocable-trust-3505393
  9. http://www.nolo.com/legal-encyclopedia/are-revocable-irrevocable-living-trusts-useful-qualifying-medicaid.html
  10. http://info.legalzoom.com/advantages-irrevocable-trust-20251.html
  11. http://finance.zacks.com/tax-benefits-irrevocable-trust-5181.html

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