On the topic of estate planning, a lot of people are familiar with the term “trust”. You may have even heard mention of terms like “revocable trusts” and “irrevocable trusts.” During estate planning discussions with possible clients, we find that these terms are often used because these clients know people who have trusts.
There’s also the possibility that their parents had a trust and spoke about it with them. Or, sometimes an aunt, uncle, grandparent, or family friend uses the trust as part of their estate planning.
However, when discussing trusts, we found that most of our clients do not really understand what they are or how they can be a useful part of their estate planning.
At Doane & Doane, PA, we are passionate about giving our clients the personalized legal counsel they need to appropriately take care of many major life and death decisions, including estate planning, trusts, Social Security matters, and more.
Differences in Trusts
The first major difference between a revocable trust and an irrevocable trust is whether the trust itself can be modified after it is created and executed. There is no trust until the owner creates and signs the trust document. The estate planning lawyer drafts the trust document, then reviews and finally signs, witnesses and notarizes to make it effective.
For revocable trusts, sometimes called lifetime trusts, individuals usually have language in the trust documents to enable them to change, modify, modify, or even completely revoke the trust in the future.
Therefore, for a revocable trust, the owner of the trust can change their minds at any time whether they want to keep the trust or terminate the trust. By comparison, an irrevocable trust is a trust that becomes more specific after being signed, witnessed, and notarized, and obtains funds by placing assets in it.
Essentially, the language in an irrevocable trust usually indicates that the trust cannot be changed, altered, or modified after it becomes effective. This is the case even if one changes his mind later.
The next difference between irrevocable and revocable trusts concerns who owns the trust property. For an irrevocable trust, the trust property such as land, bank account, vehicle or any other type of assets or property is actually transferred to the trust, and the trust becomes the owner of the property.
As such, the individuals who previously owned these assets no longer have any ownership rights, and even have no control over properties outside the trust. Again, this is because for an irrevocable trust, once it is created and funded, the trustee or the individual who created the trust cannot change it.
When it comes to revocable trusts, this is not the case. Although technically speaking, once these types of assets and properties are transferred to the trust, the trust becomes its owner, but since the trust is revocable, the ownership can be changed again at any time. Therefore, the law holds that the person who created the revocable trust continues to own or at least control the assets, including the power to revoke the trust.
And this brings us to the third big difference between these two trusts. In terms of asset protection, irrevocable trusts are far better than revocable trusts. Again, the reason for this is that if the trust is revocable, the individual who created the trust retains full control over all trust assets. This control includes the ability to transfer property from the trust back to individuals if they choose to do so. Therefore, assets placed in a revocable trust are generally not protected by the creditors who created the trust. In other words, if a person creates a revocable trust and transfers property to it, and then incurs some major liabilities, such as a judgment from a creditor, the creditor can still attach and enforce the property in most cases. In doing so, this would satisfy judgment.
The next difference between irrevocable and revocable trusts is related to federal estate taxes. At present, married couples can enjoy an asset tax exemption of $22 million in their estate before paying any type of federal estate tax. In other words, unless their estate is worth more than $22 million, a couple does not have to pay any type of federal estate tax. For couples whose estates exceed this amount, trusts can be a useful estate planning tool that can help them avoid paying federal estate taxes. However, the real key lies in whether a revocable or irrevocable trust is used.
Since revocable trusts can be modified or even revoked, they cannot be used as a way to avoid paying federal estate taxes for estates exceeding $22 million. However, irrevocable trusts can be used for this cause.
Contact Doane & Doane Today for Assistance
Doane & Doane was founded in 2003 and has continued to serve Southeast Florida’s residents and businesses through qualified legal and financial counsel. In fact, Doane & Doane is one of the area’s most trusted and respected tax and estate planning firms. If you need assistance with trusts, we encourage you to contact us at 561-656-0200. Alternatively, you can always fill out our online contact form, and we will promptly respond to your inquiry.
The information in this blog post is provided for informational purposes only and is not intended to be legal advice. You should not make a decision whether or not to contact an attorney based upon the information in this blog post. No attorney-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.