Estate planning often involves setting up a revocable trust or irrevocable trust. Each one of those trusts begins with an intervivos trust — irrevocable living trust trust you set up that goes into effect while you’re still alive.
You then decide if the intervivos trust is revocable, meaning that you can change your mind, or irrevocable, meaning sorry, what’s done is done. Irrevocable trusts are the easier of the two to understand. After you place property into an irrevocable trust, you can’t retrieve the property. For all intents and purposes, that property now belongs to the trust, not to you! With a revocable trust, however, you can place property into the trust and at some point in the future, undo the transfer by removing the property and terminating the trust.
Very often, if you die or become incompetent, the provisions of a revocable trust call for the trust to become an irrevocable trust. For example, you can terminate a revocable burial trust at any time, usually before death or incompetency. But if the burial trust still exists when you die or become incompetent, the trust becomes irrevocable and the money is used for your burial expenses. So watch out for possible death tax implications! How revocable and irrevocable trusts affect estate taxes The most significant distinctions between revocable and irrevocable trusts are the estate tax considerations. Property that you place in an irrevocable trust is no longer considered part of your estate, meaning that the property typically isn’t included in your estate’s value when it comes to determining if you owe death taxes and, if so, how much.
However, you still own property that you place into a revocable trust, and therefore that property is still subject to death taxes. If you can change your mind about the trust and retrieve the property from the trust at any time while you’re still alive, the property is really yours and should be considered part of your estate. So if you only get a break on estate taxes with an irrevocable trust, why would anyone want to use a revocable trust without the estate tax break? Estate tax savings is only one of the reasons you may consider including a trust in your estate planning. If your estate’s value is nowhere near the federal estate tax exemption, then you really don’t need to be concerned about federal estate-tax-saving tactics. Your motivation for setting up a trust may have more to do with estate protection or helping out a charity, but you also may want a safety valve that allows you to pull money out of a trust if circumstances change in some way. Make sure to work with your accountant to understand any and all tax implications — gift, federal estate, and state inheritance or estate — for property transfers to both irrevocable and revocable trusts.
He or she can help you set up the right provisions and avoid unpleasant tax-related surprises from the government because of some provision of the tax code you didn’t know about. True, you can avoid probate costs, but do you really think setting up and maintaining trusts is free? Your costs to establish a revocable trust will vary, depending on attorney fees and other costs, and be prepared to pay to have your trust managed. You also need to make sure that everything you own is held in trust form. Remember that probate isn’t always bad. The probate court ensures that the property in your probate estate is disposed of properly with no secret maneuverings and supervises your probate estate.
You don’t need to have deep pockets to benefit from a living trust, just a desire to provide for the people and causes you care about. Maybe you want to guarantee income for a family member with special needs, or you want to pay for your grandchildren’s a college education. Generally, when people talk about living trusts, they’re referring to revocable living trusts. With a revocable trust, the person creating the trust retains control of the trust property and frequently serves as the trustee. In contrast, irrevocable living trusts can’t be terminated and the grantor gives up complete control over the trust property.
So why would you want to give up complete control of your property to an irrevocable living trust? These trusts have tax advantages that revocable trusts just don’t provide. Irrevocable trusts also shield assets from creditors, and help provide for family members who benefit from not receiving a single, large gift. Creating an irrevocable trust is a serious decision. Even though you’ll give up control over the trust property, you do have control over the rules that govern the trust and you can determine the uses of the trust assets. You determine who serves as trustee and name the beneficiaries.
You can even retain the right to change beneficiaries. No Modifications: Once you create the trust, it can’t be changed or modified. Personal Tax Benefits: When appreciated assets, such as stock and real estate, are transferred into the trust, the grantor will save on capital gains taxes. An irrevocable trust doesn’t avoid taxes entirely. Property Ownership: Once you place property into an irrevocable trust, it no longer belongs to you. Asset Protection: Property placed in a trust is generally shielded from outside creditors, liens and even divorcing spouse. Long-Term Care: Moving assets to an irrevocable trust allows the grantor to obtain Medicaid benefits if he moves into a nursing home: By placing assets into an irrevocable trust five years ahead of the actual need, the grantor has secured his assets for the benefit of named beneficiaries.
Trustees: Unlike a revocable trust, the grantor cannot serve as the trustee of an irrevocable trust. Estate Tax Savings: Since the grantor no longer owns the property, it’s not included in tax calculations of the total value of property at the time of death. There are many reasons to create an irrevocable living trust, ranging from the long-term care of a disable beneficiary to shielding a home from estate taxes. Also referred to as a family trust. It’s designed to help a family save on estate taxes and can be used to provide income to your spouse or other family members during the surviving spouse’s lifetime.
You and your spouse will each have provisions in your wills directing personal assets, not community property, be used to fund the trust. This is one of the most frequently used estate planning tools because of the tax savings benefit. The tax rules are complicated but by excluding the life insurance assets from the insured’s estate, this trust can more than double the amount of policy proceeds payable to heirs. Medicaid, vocational rehabilitation, and subsidized housing. If these beneficiaries were to receive an outright gift, it could jeopardize their government benefits.
Also known as a QPRT, the grantor transfers title to their home to the trustee of the trust but keeps the right to live in the home rent-free for a term of years called for by the trust. The grantor continues to pay all the ordinary expenses. This estate planning tool is designed to protect a beneficiary from wasteful spending that may rapidly exhaust their assets. The assets are generally creditor judgments or any attempts to attach or lien against the beneficiary’s trust interest. This trust provides for distributions to at least one non-charitable income recipient for a set number of years, with the remainder paid to at least one charitable beneficiary. It allows you to donate generously while receiving tax benefits.