The Differences Between A Revocable And Irrevocable Trust
Placing assets in a trust is one of the best ways to plan for your estate. There are two broad categories of trust instruments: revocable and irrevocable trusts. Each comes with their own advantages and disadvantages, and an experienced estate planning attorney can help you determine which is best for your situation. At Fisher Law, our skilled Norwood estate planning lawyers can walk you through the differences and answer any questions that you may have. To learn more, call or contact our office today to schedule a consultation.
Ease of Establishing
One main difference between revocable and irrevocable trusts is the ease of establishing the trust instrument. Revocable trusts are fairly easy to create, with simple terms that flow easily into tax returns and other financial documents. Conversely, irrevocable trusts are very complex estate planning vehicles that require a skilled attorney to create. They are also more difficult to administer, as an irrevocable trust may have its own tax identification number and may have to file taxes separately from the grantor of the trust’s assets. These requirements are dependent upon whether the irrevocable trust is a completed gift or not. With an incomplete gift, the irrevocable trust uses the grantor’s social security number and reports income on the grantor’s individual tax return.
Modifying Trust Terms
Another significant difference is the ease in which a person creating a trust can modify the trust terms. Revocable trusts are set up in a way that easily allows the creator of the trust to alter the terms at any point up to their death, including changing the assets within the trust and who the beneficiaries of the trust will be in the estate plan. Irrevocable trusts are created in a way that makes it extremely difficult, if not impossible, to alter the terms of the trust once they are established. Even if the creator of a trust has a falling out with a beneficiary, they cannot be removed from an irrevocable trust once it is created.
Tax benefits are another difference between the two main trust types. The assets placed within a revocable trust are still considered the property of the trust creator. As such, this property is still taxed to the property owner. In an irrevocable trust, where the grantor of the trust gives up their property rights to any assets placed in the trust, income is reported on Form 1041 for the trust itself. . As such, there can be substantial tax benefits in creating an irrevocable trust, as those assets are no longer taxed to the trust creator.
Protection Against Creditors
Relatedly, there are also differences in creditor protection. Revocable trusts provide no protection against creditors. If the creator of the trust is in debt, creditors can go after the property in a revocable trust to settle claims. Because the grantor of an irrevocable trust no longer owns the property placed in the trust, irrevocable trusts provide significant protection against creditor claims. Creditors cannot go after the assets placed in an irrevocable trust, even if the grantor of the trust owes substantial debt.
Talk to Our Office
Are you interested in learning more? Call or contact Fisher Law in the Boston area today to schedule a consultation of your trust planning needs today.