Knowing the differences between irrevocable and revocable trusts is an important part of making informed decisions. At the Meurer Law Offices in Denver, we assist many of our clients with important decisions regarding trusts and estate planning. Revocable and irrevocable trusts are very different and serve different purposes. Here are some of the differences to help you better understand how each one works.
It is important to understand that assets placed in an irrevocable trust no longer belong to the grantor. Once the assets are in an irrevocable trust, those assets belong to the trust instead of the grantor. This is one of the biggest differences between irrevocable and revocable trusts.
Now, this doesn’t mean that if you use an irrevocable trust that you need to move out of your home you lived in for the last 20 years now that your home has been placed in a trust. It only means that you no longer own your home, the trust does. It is much like leasing a car or renting a house. An irrevocable trust that is properly set up, funded, and well-implemented will protect your assets from your creditors, mainly because you no longer are the homeowner. In a revocable trust, on the other hand, the grantor maintains ownership of the assets up until the grantor dies.
Changes May Not Be Allowed
A revocable trust can be changed or revoked with fair ease and at the grantor’s discretion. This also means that assets are available for anyone, like creditors or ex-spouses, to take.
An irrevocable trust is quite different. Irrevocable trusts cannot generally be modified, amended, changed, or revoked (hence the term irrevocable which means no changes). Irrevocable trusts cannot usually be altered under any circumstances, not even under court order. There is a special power of appointment, which may be used if outlined properly in the trust. This power of appointment allows a grantor to change the named beneficiaries as needed or wanted. This change would not alter the overall irrevocable trust. This is really the only allowable change in an irrevocable trust and it is only allowed if set-up to allow for beneficiary changes.
Tax Considerations are Different
Because the grantor does not own the properties or assets in an irrevocable trust, such properties and assets are not added into the total property value for inheritance tax purposes.
Revocable trusts are included in the total property value for tax purposes because the grantor owned the property at the time of his or her death. This can make irrevocable trusts quite attractive to families that have substantial amounts of assets. There are further additional tax considerations to take into account, so it is important to consult your tax advisors and an appropriate attorney before making your trust decisions.
The Importance of Asset Protection
Another of the differences between irrevocable and revocable trusts is that if you want to be sure that your assets will be protected from any creditors following your death, an irrevocable trust can be used. Your assets will also be protected from any ex-spouses or Medicaid claims.
Irrevocable trusts can be used to avoid having to sell assets to qualify for Medicaid. Medicaid’s spend-down requirements can be hard on families and spouses. Irrevocable trusts are a way to protect them and your assets.
Your assets are also protected from legal claims when they are a part of an irrevocable trust. Assets in revocable trusts, on the other hand, are not protected from such legal claims, ex-spouses, or Medicaid because the grantor retains full asset ownership. Depending on circumstances, irrevocable trusts can be helpful to use if long-term care issues arise and medical costs start to climb.
Planning for Medicaid
With more elderly folks needing long-term care, irrevocable trusts are seen as one of the primary benefits. It needs to be planned at least five years prior to care being needed. If assets are placed into an irrevocable trust, those assets are protected for beneficiaries and allow the grantor to qualify for Medicaid benefits. Revocable trusts do not offer this advantage because the grantor maintains control and ownership of the assets.
In a revocable trust, the grantor is generally also the trustee, which allows the grantor to retain control of the property and other assets in the trust until the time of death. Irrevocable trusts often have a trustee who is usually an independent person who has a fiduciary responsibility to protect the assets. The appointed trustee is bound by the provisions of the irrevocable trust and is responsible for managing the assets in the trust. The reason the trustee is usually independent of the grantor is to ensure that the trust is truly not in the control of the grantor but in the control of the provisions of the trust.
Irrevocable trusts receive their own tax identification number also referred to as an EIN. This means that the trust files taxes (form 1041). Taxes can then be paid by the trust but this is not a common occurrence. Frequently, the trust will issue a K-1 to the Grantor (or beneficiaries if the grantor is deceased) for income which the recipient will file on their own 1040 on their Schedule E. Revocable trust grantors are responsible for filing their assets appropriately as if they owned the assets because, in essence, the grantor does own the assets.
Trusts, in general, are a great way to save your beneficiaries time and money. The probate process, which can be lengthy and costly, is avoided for all assets that are in a trust. For a grantor who just wants to pass on assets without needing the probate process, the revocable trust may be best. If the assets need protection from creditors or if there are needs for other advantages, a revocable trust might be best.
If you need to better assess the differences between irrevocable and revocable trusts for your particular situation as well as your particular goals for your assets, contact us here at the Meurer Law Offices in Denver. Our estate planning experts can help you determine the best option for you and your estate.
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