By Lane V. Erickson, Idaho Estate Planning Attorney
When it comes to estate planning many people have heard the term “trust”. A few people have even heard and sometimes talk about revocable and irrevocable trusts. When we are discussing estate planning with potential clients we find that these terms are often used because these individuals know someone who has a trust. It’s possible that their parents could have had a trust and talked about it with them. Alternatively, sometimes there is an aunt or an uncle or a grandparent or a family friend who used a trust as part of their estate planning. However, when it comes to discussing trusts, we find that most of our clients don’t really understand what they are or how they could be a useful part of their estate planning.
As the premier Idaho estate planning firm, our team of skilled and experienced Idaho estate planning attorneys in the Racine Olson law office have assisted clients in the creation of their own customized estate plans for more than 70 years. Our goal is to create an estate plan that will meet the specific needs and unique circumstances of each of our clients. This often includes utilizing a trust as part of the estate planning package our clients need in order to accomplish their goals.
The purpose of this article is to discuss some of the differences between a revocable trust and an irrevocable trust. By discussing these differences we believe that you will better understand how using a trust as part of your estate planning could benefit you and your loved ones after you have passed away. Below are five differences between revocable and irrevocable trusts that you should know.
1. Modifying the TrustThe first main difference between revocable and irrevocable trust is whether the trust itself can be modified after it is created and executed. Until trust documents are created and signed by the owners there is no trust. Estate planning attorneys draft trust documents that are then reviewed and eventually signed, witnessed, and notarized in order to become effective.
With a revocable trust, sometimes referred to as a living trust, an individual usually has language in the trust documents that gives them the ability to alter, change, modify, or even fully revoke the trust at a later time. In other words, with a revocable trust, the owner of the trust can change their mind at any time about whether they want to keep the trust or whether they want the trust to come to an end.
In contrast, an irrevocable trust is one that becomes more concrete once it is signed, witnessed, and notarized, and has been funded by having assets placed in it. In other words, the language in an irrevocable trust will usually indicate that the trust cannot be altered, changed, or modified after it becomes effective. This is true even if a person changes their mind later.
2. Ownership of PropertyThe second difference between revocable and irrevocable trusts has to do with who owns the property of the trust. With an irrevocable trust, trust property such as land, bank accounts, vehicles, or any other type of asset or property, are actually transferred into the trust and the trust becomes the owner of that property. In other words, the individual who previously owned those assets, no longer has any ownership interest or even control over that property outside of the trust. Again, the reason for this is because with an irrevocable trust, once it is created and funded it cannot be changed by the trustee, or the individuals who created the trust.
The same is not true when it comes to a revocable trust. Even though technically, the trust becomes the owner of these types of assets and property once they are transferred into the trust, because the trust is revocable, ownership can again be changed at any time. As a result of this, the law considers a person who created a revocable trusts to continue to have ownership or at least control over the assets including the power to revoke the trust.
3. Protection of AssetsThis leads us to the third difference between revocable and irrevocable trust. When it comes to protection of assets, an irrevocable trust is far better than a revocable trust. Again, the reason for this is that if the trust is revocable, an individual who created the trust retains complete control over all trust assets. This control includes the ability of transferring property out of the trust back to the individual whenever they choose to do so. Because of this, assets that are placed in a revocable trust are usually not protected from creditors of the person who created the trust. In other words, if a person created a revocable trust and transferred property into it, and then had some large liability arise, such as a judgment from a creditor, that creditor would in most instances still be able to attach and execute against property in the trust to satisfy the judgment.
Alternatively, when an irrevocable trust is created and property is placed into it, the creditors of the individual who created the trust usually cannot attach or execute against the trust property. This property is then truly protected by being in the irrevocable trust..
4. Federal Estate TaxesThe fourth difference between revocable and irrevocable trusts has to do with federal estate taxes. Currently, a married couple can enjoy a $22 million exemption in assets within their estate before any type of federal estate tax is owed. In other words, a couple will not have to pay any type of federal estate tax unless their estate has a value greater than $22 million. For couples whose estates are larger than this amount, a trust may be a useful estate planning tool that could help them avoid paying federal estate taxes. The real key, however, will be whether a revocable or an irrevocable trust is utilized.
Because a revocable trust could be modified, or even revoked, It cannot be used as a way of avoiding paying the federal estate tax on an estate that is larger than $22 million. However, an irrevocable trust can be utilized for this purpose.
To illustrate how this works, let’s say we have a couple that has an estate worth $30 million. If this couple were to create an irrevocable trust, and transfer more than $8 million worth of money, property, and/or assets into the trust so that the trust now owns them, this couple may be able to avoid owing any federal estate taxes because the value of the estate that they still own individually is now below the $22 million mark.
To be sure, there is far more information about revocable and irrevocable trusts than can be contained in one simple article. If you would like to learn more about how these trusts may benefit you, we encourage you to contact us and to schedule a consultation so that we can review these trust options with you as well as how they may help you individually. We have assisted numerous clients in using trusts as part of their estate plan so that it accomplishes what they want and we are confident that we can help you too!
Enlist an Idaho Estate Planning Attorney to Help YouOur team of Idaho lawyers can help you with any of your estate planning or probate needs. Whether you are seeking to create or review an estate plan for yourself or would like to help a loved one, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho Estate Planning problems.