Trusts are an essential estate planning tool that can be used to accomplish a variety of objectives. However, it’s important to understand that not all trusts are the same. There are two basic types of trusts — revocable trusts and irrevocable trusts. If you’re considering using trusts in your comprehensive estate plan, it’s vital to understand the differences between revocable vs. irrevocable trusts to help ensure your wishes are carried out.

What is a Revocable Trust?

A revocable trust, also referred to as a living trust, is a trust that can be changed at any time. The grantor is usually named as the trustee in order to allow them to have full control of the trust during their lifetime. They may change the trust terms, remove beneficiaries, add new beneficiaries, or make modifications regarding how the assets should be managed at any time after the trust has been created. A revocable trust becomes irrevocable upon the death of the grantor.

There are a number of advantages to setting up a revocable trust vs. an irrevocable trust, including avoidance of probate. In contrast with an irrevocable trust, a revocable trust can be amended at any time. This allows the grantor to make alterations when major life events occur, such as marriage or the birth of a child. In addition, if the grantor becomes incapacitated, the chosen successor trustee can take control of the trust and administer it in accordance with the terms — this makes a revocable trust a crucial part of incapacity planning. A revocable trust becomes irrevocable during the time of the grantor’s incapacity.

What is an Irrevocable Trust?

An irrevocable trust is a type of trust that cannot be changed or modified after its creation without the consent of the beneficiaries or court approval. It transfers the assets from the grantor’s name to that of a beneficiary. Once the assets are placed in a trust, they are managed by a third party, called a trustee. It is the trustee’s responsibility to determine how the assets are invested when the grantor passes away. Nevertheless, the trustee must manage the trust in accordance with the instructions set forth by the grantor and documented in the trust instrument.

Irrevocable trusts are typically established to achieve one or more specific objectives. For instance, many people set up irrevocable trusts to minimize estate taxes, avoid probate, access government benefits such as Medicare, protect assets from creditors, and safeguard assets from legal judgments. They can also allow the trust creator to gift assets to the estate while still retaining the income from them.

Significantly, a common type of irrevocable trust is a testamentary trust — this trust is created upon the death of the creator and is funded by their estate, according to the terms of their last will and testament. However, it is essential to understand that this type of trust does not avoid probate since the creation of the trust is dependent upon the terms of the will, which must go through the probate process.

What are the Key Differences Between Revocable vs. Irrevocable Trusts?

Both revocable and irrevocable trusts have various pros and cons, depending upon your goals. However, it’s critical to understand the differences when it comes to revocable trusts vs. irrevocable trusts to determine which trust can help you achieve your specific estate planning goals. A skillful estate planning attorney can advise you regarding the trust that is best for your circumstances.

Some key differences between revocable and irrevocable trusts include the following:

• The assets in a revocable trust are typically not shielded from creditors, while the property in an irrevocable trust is protected from creditor claims.
• A revocable trust can be altered during the grantor’s lifetime, while the terms of an irrevocable trust typically cannot be changed.
• Unlike a revocable trust in which the assets still count as the grantor’s resources, an irrevocable trust allows the grantor to qualify for Medicare or nursing home care.
• A revocable trust allows the grantor to act as their own trustee and retain control over their financial affairs. With an irrevocable trust, the grantor gives up ownership and direct control of their assets.
• When an irrevocable trust is set up, the trust becomes the owner of any property put into the trust. With a revocable trust, the person who created it is considered to be the legal owner over the assets in it.
• In contrast with an irrevocable trust, a revocable trust cannot be used to avoid estate tax obligations or provide protection against creditors.

Whether revocable vs. irrevocable trusts are right for you will depend on your situation. Revocable trusts are very flexible and can allow you to avoid probate — not all types of irrevocable trusts can avoid this process. If you think you might want the freedom to make modifications to your trust and change the trust beneficiaries over time, a revocable trust might be the better option. A revocable trust may also be advantageous for those who wish to continue managing and using the assets in the trust.

However, an irrevocable trust might be best for you if the value of your assets is higher than the federal estate tax exemption and you seek to avoid incurring a high estate tax burden. You may also consider an irrevocable trust if you are comfortable with the idea of not controlling your own assets after the trust has been established — and you wish to have protection from certain creditors and future lawsuits.

Contact an Experienced Ohio Estate Planning Attorney

Setting up a trust can be a complex process. At Middleton Law Offices, our estate planning attorney team takes the time to carefully consider your goals and discuss your concerns. We will work with you to create a trust that will help safeguard your assets and satisfy your estate planning objectives. Offering trusted legal services for your estate planning needs, we are committed to ensuring you understand your options and have peace of mind. Contact Middleton Law Offices today at 419.548.0196 for a consultation to learn how we can help.