A trust by definition is a stand alone instrument which is a legal entity. The details of the trust are devised by you in conjunction with consultation from accounting and legal professionals. State and federal laws must always be considered when doing any type of estate planning.
Trusts have gained favor in recent years. An estate planning professional who knows your wishes along with accurate financial details of your estate can assist in determining if a revocable or irrevocable trust would be beneficial.
Revocable trusts are an instrument where the terms are revocable. It can be rewritten at any time. One of the benefits is control of the trust and the flexibility of changing the terms.
Revocable trusts are the most popular and one of the main uses is to provide guidance and terms for a beneficiary that may be a minor or disabled. A revocable trust is not the instrument if one is seeking protection from estate taxes. The assets inside a revocable trust are not exempt from estate tax. These assets are also subject to creditors including nursing facilities and long term care facilities.
Another consideration is that the assets of a revocable trust can also be subject any property in the trust to the trustees’ creditors. If the goal is to provide asset management should you become disabled or incapacitated, a durable power of attorney may be able to accomplish the same.
Irrevocable trusts relinquish control of the trust to a Trustee. Changing the terms of Irrevocable Trust cannot be accomplished without the express approval of all involved. This includes the beneficiaries.
The advantage of irrevocable trusts is that they can remove property value from an estate so that the state will not be taxed so heavily. These type of trusts rely on the division of the estate to a spouse, family member or trusted friend. These type of trusts essentially transfer ownership to the trustee or beneficiary so that a person technically no longer owns their assets meaning that no taxes will have to be paid for transfer of ownership. This benefits a surviving spouse or family member as estate taxes can be extremely expensive when real estate changes hands.
Estate tax should definitely be considered when comparing the positives and negatives of both types of trusts. The current Internal Revenue Service’s exemption for estate taxes is $10.6 million per couple. This obviously excludes the majority of Americans.
When it comes to estate planning it’s especially important that you understand the difference between revocable and Irrevocable trust. For senior citizens or the elderly it’s very important to fully understand each type of trust as well as its’ financial implications. Knowledge, research and consultation with legal professionals can help one determine if a trust is necessary for your estate planning and its’ goals.
Legal and tax consequences could be extremely significant should you make the wrong choice for your estate, heirs and beneficiaries.
Additional educational information can be found on the American Bar Association website.