It is important that estate holders select the best tools to carry out their estate plans. For those estate holders with large or complex estates, trusts are often beneficial options to keep assets from being tied up in probate.
There are different types of trusts, and revocable and irrevocable trusts are the most common.
Revocable and irrevocable trusts may operate the same in many ways, in that they both allow parties to allocate different assets to select beneficiaries by separating the property into the trust account. However, the manner in which the estate holder may interact with the account differentiates the two trusts.
As the name indicates, parties may end, or revoke, a revocable trust; the person who sets up the trust may be the trustee of the assets contained in it, and may control these throughout his or her lifetime. Once an estate holder dies, the revocable trust becomes irrevocable, and the trustee named as successor must follow all the instructions to the letter.
On the other hand, once an irrevocable trust is in place, parties have little to no recourse for making changes. Therefore, it is important that parties have foresight for how they plan to treat assets when selecting the type of trust they want to use.
Trusts and taxes
Another aspect that differentiates the two types of trusts is how the courts treat them in regard to taxes. Revocable trusts are still subject to estate taxes, while irrevocable trusts are not. This is due to how the court views the assets. Estate holders technically cannot access assets once they are in an irrevocable trust, so those assets are no longer part of the estate; therefore, they are not subject to estate taxes. However, recipients should be aware that the irrevocable trust might face other taxes.