A trust is a fiduciary relationship among the grantor that is the party transferring a property upon the trustee for the benefit of the beneficiary. In some instances, it may be that one person fulfills these various roles but often a trust will list multiple people in each capacity.
A revocable trust can be amended at any time and offers flexibility during the lifetime of the grantor. An irrevocable trust cannot be modified, amended or terminated; however, certain necessary changes can be made through court proceedings or a process known as decanting.
Key Differences in Structure
The grantor of an irrevocable trust transfers property into the trust and permanently gives up all claim to such property. The trustee, a third party, manages the trust by following the terms of the trust.
A revocable trust offers vastly more flexibility. The grantor of a revocable trust owns and controls the trust assets and can make any changes she/he deems necessary at any time. A revocable trust also has a trustee who manages the trust according to its terms following, for example, the incapacity of the grantor.
Key Differences in Taxes
An irrevocable trust is considered a separate entity and must file under its tax ID number its own annual tax returns. For that reason, an irrevocable trust is ineligible for various deductions and exemptions an individual may claim and is subject to a high federal tax rate.
Assets in the name of a revocable trust are considered the property of the grantor and income earned from such property is filed along with the grantor’s other income.
Key Differences in Asset Protection in the Future
An irrevocable trust may offer creditor protection, but a court can reclaim those assets to the extent of unjust transfer, for example, in contemplation of a lawsuit. Funds may need to be in the name of the trust for some period of time to be protected. One additional note is that a carefully drafted revocable trust can protect your beneficiaries from their creditors.
A revocable trust offers no such protection to the grantor since it remains the grantor’s property.
Summary
A revocable trust is an excellent option if layers of protection are not necessary but you want to establish provisions for the future. If there are estate tax planning, creditor protection, government program eligibility or providing for a special needs family member considerations with which you are grappling, an irrevocable trust might work well for you. The Estate Planning attorneys at Mesch Clark Rothschild would be happy to work with you to create the plan that works best for you and your family.
