With both a revocable and an irrevocable trust, the person setting up the trust, who is known as grantor or settlor, executes a legal document creating a trust and then transfers assets to the trust. How much access the settlor retains to the assets transferred to the trust determines how the trust is characterized.

In a revocable trust, once the trust is set up, the settlor still has the ability to terminate the trust or revoke it. That means that the settlor still has control over the assets in the trust because if the settlor wants to take the property from the trust, he or she can do so, and simply revoke the trust thereafter. Inter vivos trusts, or living trusts, are trusts created during the settlor’s life. These kinds of trusts can either be revocable or irrevocable.

Irrevocable trusts operate in the opposite way. Once the settlor creates an irrevocable trust and transfers assets to the trust, he cannot access the assets again or terminate the trust. The assets in the trust belong to the trust, and can be distributed to the beneficiaries of the trust according to the trust document. Trusts that are created through a person’s will are known as testamentary trusts, and are always irrevocable because the settlor is deceased by the time the trusts comes into existence.

In some cases, a settlor can create a revocable trust, with a provision in the trust documents to convert the trust into an irrevocable trust if the settlor becomes incapacitated. This can help keep the settlor’s wishes regarding the trust and its assets in place even when the settlor can no longer express those wishes.

A settlor can name him or herself as the beneficiary under either a revocable or an irrevocable trust. Trusts that are sometimes used to hold a settlor’s assets in order for the settlor to qualify for some government assistance, such as Medicaid, are usually required to be irrevocable in nature. If a settlor wishes to create a trust in order to avoid estate taxes, then the trust generally has to be an irrevocable trust. If the trust is created as a revocable trust, the settlor never quite loses control of the assets in the trust and those assets are still able to be considered a part of the person’s assets for tax purposes.

Contact an Experienced Estate Planning Attorney

There are many reasons to use a trust, including as part of your estate plan. If you need to use a trust, it is important to discuss the various trusts that may be most advantageous in your situation. To put together an estate plan that includes the use of trusts, and addresses your individual needs and wishes, contact Resnick Law, P.C., to consult the experienced estate planning attorneys in Bloomfield Hills and Detroit, Michigan.

(image courtesy fo Aidan Bartos)

While similar in concept, the differences are both critical and key to making an informed decision about the best device available for your estate planning. Here are some of the major differences between the two devices that can help you determine which type of trust is more suitable to your needs.

1. Ownership of Property

Once assets are placed in an irrevocable trust, the property no longer belongs to the Grantor; it now belongs to the trust. That doesn’t mean you can’t still reside in your home of 30 years, but technically you no longer own it; the trust is now the owner. This is different from a revocable trust, where the Grantor retains completed ownership of the property.

2. Modification

An irrevocable trust agreement generally cannot be changed, amended, modified or revoked even with a court order, thus offering the coveted asset protection, whereas a revocable trust allows the instrument to be modified or revoked at the Grantor’s discretion; this means that the assets in a revocable trust are still available for anyone to take.

3. Estate Taxes

With an irrevocable trust, since the Grantor no longer owns the property, it is not included in calculations of the total value of property at the time of death. With a revocable trust, since the Grantor still owns the property, the value of the property in the trust will be included in the calculation of the total value of property at the time of death.

4. Protection of Assets

With an irrevocable trust, since the assets in the trust no longer belong to the Grantor, they are generally protected from creditors or from other claimants. This serves to protect assets from the claims of creditors, Medicaid, and even divorcing spouses. Conversely, with a revocable trust, the assets are not protected; since the Grantor retains full control and power over the assets, he is still liable for legal claims against the assets.

5. Appointment of Trustee

With an irrevocable trust, the Trustee generally is, and should be, an independent person chosen by the Grantor in order to create a fiduciary duty to protect the assets — family members acting as a Trustee usually do not offer this benefit. With a revocable trust, the Grantor often also serves as the Trustee, maintaining control over the assets in the trust.

6. Income Tax Return

With an irrevocable trust, generally, the trust has its own tax identification number (EIN), files a 1041, and then either pays the tax itself (not typical) or issues a K-1 to the Grantor (or the Beneficiaries if Grantor is deceased) for income that flows through to the recipient’s 1040 return through Schedule E. With a revocable trust, there is no such discrepancy; the taxpayer files everything on their 1040 as if they personally owned the assets that generated income — because they do own the assets.

As with all estate planning, the laws can change, so a consultation with an expert is advised before determining which device is more appropriate for your situation.