When it comes to estate planning, one of the most important decisions you’ll make is how to handle your assets after you're gone. A living trust is a popular choice for many because it helps manage the distribution of assets and avoids the lengthy probate process. But which type of living trust should you choose?
What is a Living Trust?
A living trust is a legal document created while you're alive that holds ownership of your assets. As the trust's creator (grantor), you can continue to control the assets during your lifetime. When you pass away, your designated trustee will manage and distribute the assets according to your instructions, avoiding the probate process.
The two primary types of living trusts are revocable and irrevocable. The main difference between them lies in their flexibility and how they are taxed. Let’s dive deeper into each type.
1. Revocable Living Trust
A revocable living trust is a flexible option that allows you to retain control over your assets. You can change or revoke the trust at any time during your lifetime, as long as you're mentally capable.
Key Features of a Revocable Trust:
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Flexibility: You can modify the terms, change beneficiaries, or even revoke the trust entirely whenever you want.
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Control: You remain in control of the assets in the trust, acting as the trustee if you choose.
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Probate Avoidance: When you pass away, the assets in the trust are not subject to probate, saving your heirs time and money.
Advantages of a Revocable Trust:
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Avoids Probate: Since assets in a revocable trust bypass probate, your estate can be settled quickly, without court involvement.
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Peace of Mind: You maintain control and can make changes whenever necessary. It’s a good option for those who anticipate changing circumstances.
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Incapacity Protection: If you become incapacitated, a successor trustee can step in to manage your affairs according to your wishes.
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Privacy: Unlike a will, which becomes public during probate, a revocable trust keeps your estate matters private.
Disadvantages of a Revocable Trust:
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No Asset Protection: Because you still control the assets, they remain susceptible to creditors and lawsuits.
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No Tax Benefits: A revocable trust doesn’t offer any direct tax advantages.
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Setup Costs: Setting up a revocable trust typically involves higher legal fees compared to a basic will.
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Ongoing Management: Managing a trust requires continuous updates, which can be time-consuming and cumbersome.
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No Medicaid Exemption: Assets in a revocable trust are still considered when assessing eligibility for Medicaid or other government programs.
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Partial Probate Avoidance: In some cases, not all assets in the trust may be fully protected from probate, especially if they weren’t properly transferred.
2. Irrevocable Living Trust
An irrevocable living trust is permanent. Once you create this type of trust and transfer assets into it, you can no longer make changes or revoke it. The assets are removed from your ownership, and the trust becomes the legal owner.
Key Features of an Irrevocable Trust:
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Permanence: Once assets are placed in the trust, you can't alter or revoke the trust unless you have the consent of all beneficiaries or court approval.
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Asset Protection: The trust, not you, owns the assets, meaning they are shielded from creditors or lawsuits.
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Estate Tax Benefits: Because you no longer own the assets, they’re not part of your taxable estate, potentially reducing estate taxes.
Advantages of an Irrevocable Trust:
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Asset Protection: The trust provides strong protection from creditors and legal judgments since the assets are no longer considered your property.
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Estate Tax Reduction: Since the assets are out of your estate, an irrevocable trust can help reduce estate taxes.
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Eligibility for Government Benefits: Irrevocable trusts can help lower your taxable income, which can be beneficial for qualifying for Medicaid or other government assistance programs.
Disadvantages of an Irrevocable Trust:
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Loss of Control: Once assets are transferred into the trust, you lose control over them, which can be a significant drawback if your circumstances change.
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No Flexibility: Making changes to an irrevocable trust requires the approval of all beneficiaries or the courts, which can be a lengthy and costly process.
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Gift Tax Consequences: Transferring assets into the trust may trigger gift taxes, and the trust may require separate tax filings.
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Limited Access to Funds: Since you no longer own the assets, you cannot easily access them for personal use.
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Inflexible Terms: Once the trust is established, it’s difficult to modify its terms to accommodate changes in your life.
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Potential Loss of Step-Up in Basis: Assets placed in an irrevocable trust may not receive a step-up in basis upon your death, leading to higher capital gains taxes for your heirs.
Which Trust Should You Choose?
Choosing between a revocable and an irrevocable trust depends on your specific goals. Consider the following when making your decision:
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Revocable Trusts are ideal if you want flexibility, control, and the ability to change the terms of your trust as your life evolves. They're great for people who want to avoid probate and maintain privacy but don’t need asset protection or tax benefits.
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Irrevocable Trusts are better suited for those who want to protect their assets from creditors, reduce estate taxes, or ensure eligibility for government assistance. However, be aware that you lose control over the assets once they’re in the trust.
Need Help with Estate Planning?
Choosing the right type of trust is an important step in your estate planning process, and it’s important to work with an experienced attorney to ensure you make the best decision for your family. At Doane & Doane, our team of estate planning attorneys is here to help you navigate the different trust options and create a plan that works for your unique needs.
If you're located in Palm Beach County or the surrounding areas and need assistance with estate planning, contact us today for a consultation. We’ll help you understand your options and ensure your assets are handled according to your wishes.
