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Differences Between Revocable and Irrevocable Trusts 

Moses Estate Planning, PLLC  Sept. 15, 2022

Even if you know you need an estate plan in place, it’s often hard to know exactly what documents you’ll need and how to set them up to ensure your loved ones are taken care of after you pass away. Most people begin their estate planning journey by considering a simple will, and while this is a great first step, a simple will often won’t give you the protections and flexibility that a trust can.  

If you’d like to learn more about setting up a revocable living trust or irrevocable trust (and to gain a better understanding of the differences between the two), contact us at Moses Estate Planning, PLLC. We have offices in Coeur d'Alene, Idaho, and Los Angeles, California, to serve our clients. Planning for your eventual passing is never easy, but it is important, and we can help you do it right. Reach out today to schedule a consultation. 

What Is an Irrevocable Trust?  

If you are concerned about how your assets will be protected and distributed after your death, you may wish to consider using a trust instead of (or in addition to) a will. However, it’s important to know the difference between the two main types of trusts you’ll encounter: irrevocable trusts and revocable trusts. 

It is important at the outset to point out that regardless of which type of trust is used, trusts avoid probate. With a standard will, your assets remain in your name, and after you die, your loved ones must go through the lengthy legal process of probate. However, if you pass away with a trust in place, your assets do not have to go through the probate process and can instead be transferred directly to your beneficiaries without the court's approval. This saves your heirs time, money, and the hassle of dealing with the courts. 

Essentially, a trust is a legal agreement between a trustor (you) and a trustee that’s made while you’re still living and of sound mind. You will transfer certain assets into the trust which then become legally owned by yourself as trustee. At your passing, your successor trustee takes over and distributes your assets to your beneficiaries according to your wishes.

A majority of trusts used in estate planning are revocable, meaning they can be changed and altered after they’ve been signed. An irrevocable trust, however, is one that cannot be modified once it’s been signed. While an irrevocable trust may initially seem to provide much less flexibility for the creator of the trust, in certain situations, an irrevocable trust can provide significant estate tax, asset protection, and other benefits for one's estate planning. Furthermore, if the appropriate state is used for the trust formation, a client may be able to retain a significant amount of flexibility that would not be available in other states.

There are numerous types of irrevocable trusts, however below are listed some of the most common types of irrevocable trusts used for our clients. The best way to decide what kind of trust is right for you is to meet with an estate planning attorney who has knowledge of both state and federal inheritance and tax laws and how these can affect your assets. 

Irrevocable Completed Gift Trust: In certain cases, a client may have assets that are in excess of the "estate tax exclusion amount," which is currently set at $12,060,000 as of 2022. If this is the case, a client may wish to consider gifting assets to an irrevocable trust now in order to have preferential tax treatment down the road. All assets above $12,060,000 will be taxed at 40%. Therefore, if the client makes a gift now of $12,060,000 to an Irrevocable Completed Gift Trust, any appreciation of those assets during the client's lifetime will be considered outside of the client's estate for estate tax purposes at his or her passing, thereby resulting in an extremely advantageous estate tax position.

Irrevocable Asset Protection Trust: Assets held in an Asset Protection Trust are generally protected from creditors of the client, however establishing this type of irrevocable trust must be done before there is a claim against the client in order to provide the strongest level of asset protection. Because the trust owns the property at issue and the trust exists as its own separate entity, the assets are simply not on the table if there is a judgment against the client. There are many legal intricacies within asset protection, and each situation deserves special attention to make sure the appropriate firewalls are being established to protect the assets at issue.

Special Needs Irrevocable Trust: This type of trust is ideal for those who have a special needs dependent, such as a disabled family member. In these cases, if your dependent currently receives federal benefits based on their physical or mental condition, they may lose those benefits if they were to inherit a significant amount of assets at one time. By using an irrevocable trust, these assets can be distributed incrementally, and your loved ones won’t risk losing their government benefits. 

Irrevocable Life Insurance Trust: In many cases, life insurance proceeds are included in one's estate for estate tax purposes and can therefore be heavily taxed. If you leave these assets to your heirs in a standard will or revocable trust, they could be forced to pay a significant portion of the life insurance policy to cover these taxes. However, by using an irrevocable trust, the policy is left to the trust (not your heir) and managed by your trustee who will then be responsible for making regular payments to your beneficiaries.  

Irrevocable Charitable Trust: For those who wish to leave all or a portion of their estate to a charitable organization or nonprofit, an irrevocable trust may be considered for tax purposes. This type of trust will allow the trustor to continue to receive payments from the earmarked assets while they’re still living, and when they pass away, the rest will be given to the charity. Alternatively, a lump sum can be given to charity now, with payments made to the client for the remainder of his or her lifetime. There are numerous sub-categories of Irrevocable Charitable Trusts, however, all such trusts focus on offering tremendous estate tax savings paired with philanthropic goals.

Irrevocable Trusts vs. Revocable Trusts  

It is possible for an individual to have both kinds of trusts as part of their estate planning portfolio, but it is essential to know the benefits of a revocable living trust versus an irrevocable trust.  

The most important benefit of a revocable trust is that it can be modified during your lifetime. This means that you can add or remove assets, change and rename beneficiaries, and even change who your trustee is. You will have full control over your assets while you’re alive, even while they’re technically titled under the name of the revocable trust. A revocable trust is a great option if one's goals are to avoid probate and don't have any estate tax issues looming.

An irrevocable trust, on the other hand, may offer limited flexibility, but this is part of its appeal. These trusts are ideal for those who want the most protection for their assets against creditors and/or estate tax penalties, or for those who may be concerned about the spending habits of their beneficiaries and want a safeguard in place to ensure they’re taken care of in the long run.  

Seek Skilled Counsel 

If you’re in Coeur d'Alene, Idaho, anywhere in Kootenai County, or Los Angeles, California, and would like to speak with someone about setting up a trust or your estate plan generally, contact us at Moses Estate Planning, PLLC.