As a legal entity, a trust can own assets such as real estate, brokerage accounts, life insurance, cars, bank accounts and personal belongings, like jewelry. Revocable trusts, also called revocable living trusts, provide complete control over your assets and how you would like them to be distributed, without court involvement or a very public court proceeding. Distribution of assets takes place according to the instructions in the trust.
On the other hand, irrevocable trusts are used to reduce the size of the taxable estate, to plan for the well-being of loved ones, and to protect the individual and couple if long-term care is needed. An experienced Tyler estate planning attorney like Bradley S. Campbell, can help determine which trust is best for your unique situation.
A revocable trust keeps your options open argues Kiplinger’s article entitled, “What to Consider When Deciding Between a Revocable and Irrevocable Trust.” As the grantor, you can change or revoke the trust anytime. This includes naming a different trustee or beneficiary. This gives you leverage over the inheritance. If your beneficiary doesn't listen to you, you can still change the terms of the trust. You can also even take your assets back from a revocable trust. There are typically no tax consequences for doing so because only after-tax assets can be placed in a trust while you're alive.
If a revocable trust seems much like owning the assets yourself, that's because there's really little difference in the eyes of the law. Assets in your revocable trust still count as part of your estate and aren't sheltered from either estate taxes or creditors.
First, revocable trusts create a smoother financial transition if something happens to you. If you die or can no longer manage your financial affairs, your successor trustee takes over and manages the trust assets according to your directions in the trust documents.
Second, revocable trust assets bypass the Texas probate system after you die so that your heirs receive them quicker. During probate, a Texas state court validates your will and distributes your assets according to your written instructions. If you don't have a will, your property is distributed according to state probate law. If you own homes in multiple states, your heirs must go through probate in each one. However, if that real estate is in a revocable trust, your heirs could address everything in your state of residence and receive their inheritance more quickly.
Third, the contents of your revocable trust remain private and out of bounds, whereas estates that go through probate are a matter of public record that anyone can access.
Fourth, revocable trusts, like assets held outside a trust, get a step up in basis so that any gains are based on the asset's value when the grantor dies.
In comparison, an irrevocable trust is harder to modify, and even revocable trusts eventually become irrevocable when the grantor can no longer manage their own financial affairs or dies. To change an irrevocable trust while you're alive, the bar is high but not impossible to overcome.
One benefit of an irrevocable trust is that assets are not controlled by the beneficiaries but can be used by the trustee for the beneficiary’s health, education, maintenance and support. Thus, irrevocable trust serve as a planning tool to transfer assets for the benefit of another person, a loved one, friend, child, or grandchild, without making an outright gift.
Another benefit of irrevocable trusts is for safeguarding assets for purposes of Medicaid planning to protect the individual and couple if long-term care is needed. For example, an Irrevocable Medicaid Asset Protection Trust protects one's life savings and home from the cost of long-term care, while allowing the trust’s creator to continue to live in their home and benefit from income generated by assets transferred into the irrevocable trust.
A third major benefit of irrevocable trusts is for estate tax planning to reduce the size of the taxable estate. Assets in an irrevocable trust generally don't get a step up in basis. Instead, the grantor's taxable gains are passed on to heirs when the assets are sold.
Which trust you choose depends on the variables for your situation, and Tyler Estate Planning Attorney can review your goals and help you decide what solution will achieve them. Book a consultation with his office to get started.
Reference: Kiplinger (July 14, 2021) “What to Consider When Deciding Between a Revocable and Irrevocable Trust”