Many people have questions pertaining to the differences between revocable and irrevocable trusts. This post summarizes their contrasts.
Revocable Trusts
Flexibility
The grantor (creator) can modify or revoke the trust during their lifetime.
Control
The grantor can act as both the trustee and beneficiary, maintaining control over trust assets and decisions.
Probate Avoidance
Assets held in a revocable trust can avert probate, facilitating a smoother transfer of assets upon the grantor’s death.
Tax Treatment
The trust’s income is typically taxed at the grantor’s individual tax rate.
Creditor Protection
Provides limited asset protection against creditors since the grantor retains control over trust assets.
Irrevocable Trusts
Permanence
Once verified, the terms of the trust generally cannot be altered or revoked by the grantor.
Asset Protection
Assets transferred to an irrevocable trust are normally shielded from the grantor’s creditors and legal judgments.
Tax Benefits
Irrevocable trusts may offer estate tax benefits, as assets are eliminated from the grantor’s taxable estate.
Medicaid Planning
Irrevocable trusts can be utilized for Medicaid planning purposes to help qualify for government benefits.
Control
The grantor relinquishes control over trust assets and decisions, as these are managed by the appointed trustee(s).
Tax Treatment
Income generated by the trust may be taxed at a separate, sometimes more favorable, trust tax rate.