Revocable Versus Irrevocable Trusts
The advantages and disadvantages depend on your needs and desires. Estate planning is an important part of growing older, and the question that inevitably arises is whether to set up a revocable or irrevocable trust. The answer, meanwhile, depends on the person asking the question, as well as his or her needs and desires. One thing’s for sure, though: If we fail to accomplish any estate planning, our loved ones will have a more complicated time sorting out our finances after we’re gone.
In general, the difference between a revocable trust and an irrevocable trust is simple: one you can change, the other you can’t.
“Irrevocable trusts are the easier of the two to understand,” write N. Brian Caverly, Esq., and Jordan S. Simon for the website Dummies.com. “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.”
There are advantages to both. As far as irrevocable trusts go, because the money is no longer “ours” – we can’t retrieve it – it isn’t subject to death taxes, which is a boon to our beneficiaries. On the other hand, a revocable trust allows us to keep control of our assets in order to access them during difficult times, during unforeseen situations, or even to treat ourselves or our loved ones while we’re still alive and still arranging for an uncomplicated disbursement after we’re gone.
“A revocable living trust allows your heirs to avoid probate entirely and keeps you in complete control of your finances while you’re alive,” writes author and finance expert Suze Orman on Oprah.com. “You can always make changes to what’s in the trust and to how you’d ultimately like it managed or disbursed. When you die, the person you designate as your successor trustee simply takes over and follows your wishes.”
Orman says that a will should also be created so that people can “carefully specify how you want your noninvestment possessions to be disbursed.”
Of course, many people opt to gift money to loved ones while they are still alive, and by keeping it under a certain amount – $13,000, as of 2012 – beneficiaries can avoid taxes. But, cautions Orman, “[b]efore you give away anything … think seriously about your own future: Today’s 65-year-old woman will live an average of 20 more years, and you need to be sure your own retirement is secure before you contemplate giving anything away.”
The same could be said for making the decision between a revocable and an irrevocable trust: Make sure you have enough to live on before you put too much money into an irrevocable trust. But the bottom line is, do something.
“The fact is, most Americans don’t have a will, let alone a revocable living trust,” Orman notes. “Yet ask anyone who has dealt with the estate of a deceased family member who didn’t have solid plans in place, and they’ll tell you how frustrating, time consuming, and expensive it is to get everything sorted out.”