To explain it simply, a revocable trust (also called a living trust) may be changed after it is created. An irrevocable trust is quite difficult to change. An individual may choose to form an irrevocable trust to receive certain tax-shelter benefits not provided by a revocable trust.
What is the purpose of a trust?
A trust is a legal entity separate from the individual who created it. The trust is created to manage the assets of the trust creator. A trustee is named, and the trustee manages the trust. Instead of creating a will, wealthy individuals may set up a trust to ensure that:
- Assets are managed the way the trust creator has directed;
- Specified individuals benefit from the trust, particularly after the trust creator has passed away;
- The trust creator is sheltered from taxes on income generated by the assets;
- The assets in the trust are protected from creditors;
- The assets in the trust are sheltered from estate taxes.
Why choose a revocable trust?
A revocable trust offers the benefit of flexibility. The creator of the trust may change its terms at any time, including removing beneficiaries, adding new beneficiaries, and change the way the trust’s assets are managed.
An individual may create a revocable trust to ensure privacy for certain assets, to hold assets for minor children or family members with special needs, or to protect assets from probate (a trust is more difficult to contest than a will). In short, the creator of a revocable trust maintains control while also ensuring a level of asset protection.
There are other factors to consider. In a revocable trust, the assets are not shielded from creditors. This means that a judge can order the trust assets to be liquidated in order to satisfy creditors. If a person dies with a revocable trust, the assets in the trust will be taxed at the state and federal levels.
Why choose an irrevocable trust?
The rules regarding an irrevocable trust are quite rigid. When the trust is created, the stipulations set forth cannot be changed except under rare circumstances. Effectively, the trust creator has transferred all ownership of the assets to the irrevocable trust. The assets are no longer considered part of that individual’s estate and thus are not subject to estate taxes. The trust creator is not responsible for taxes on income generated by the assets, and the assets cannot be liquidated in order to satisfy the trust creator’s creditors.
For wealthy people, the benefits of an irrevocable trust can be significant. Also, they can feel assured that the beneficiaries they have designated will benefit from the trust. The trustee is obligated to carry out the wishes of the trust creator. Assets protected by an irrevocable trust very rarely end up in probate.
Setting up the right trust for you
Deciding which type of trust will be most beneficial to you, and setting up a trust, requires the expertise of an experienced estate planning attorney in Chester County. This is a complex legal specialty that requires the assistance of an attorney who has planned for sizeable estates. Click here to set up your initial consultation.