This article looks at revocable and irrevocable trusts, what they are, what benefits they provide and when to use them.
We look at the difference between a revocable vs irrevocable trust and look at revocable vs irrevocable trust usage cases to determine which one is best, depending on your specific circumstances and precise needs. Revocable trusts might give you more flexibility, but an irrevocable trust has more tax benefits.
In the end, it all comes down to peace of mind, making sure that your assets are well protected and that they go to your chosen beneficiaries after you’re gone. Since trust law can be often confusing, there’s always the danger that you make the wrong choice and cause unnecessary stress to your family after you’re gone. That’s why it’s always advisable to get reliable advice from industry experts.
At Nomad Capitalist we can help, we’re experts in offshore trust formation, allowing you to get the maximum asset protection and most efficient tax reduction, so your loved ones can benefit from your wealth for generations to come. Contact us today to learn more.
Revocable vs Irrevocable Trusts – TL;DR
Revocable trust vs irrevocable trust – which is best?
It all depends.
Revocable trusts give you more control, allowing you to continue to make changes to the trust once created.
Irrevocable trusts allow you to avoid paying estate taxes but they can’t be changed after the fact.
So once you’ve established the trust and transferred your assets, the trust is locked in place.
Both provide protection for your assets and property and allow for a smoother transition of your estate without the need for messy probate proceedings.
Trusts And Estate Planning
A trust is a highly versatile structure which can be used for a variety of purposes, for example, you could set up a charitable trust for philanthropic reasons, or an asset protection trust to protect assets from creditors and/or predatory litigation.
The use of trusts for estate planning, meanwhile, is another popular use of trust structures and offers a range of benefits, particularly for high-net-worth individuals with sizable assets.
There are three parties in a trust structure. The trust owner, known as the settlor, (also sometimes known as the grantor) creates the trust through the drafting of a trust document.
This is a legal document which details, in full, how the trust shall operate and who the beneficiaries are – i.e. the individual or individuals who will ultimately gain control of the trust property and assets.
The settlor acts as the initial trustee before nominating a successor trustee. The successor trustee, whom we will from now on refer to as just the trustee, is a professional who the settlor appoints to manage the trust after his or her death.
The trustee can be an estate planning attorney, or it may be a company or law firm operating in a fiduciary capacity on behalf of the settlor.
As settlor, you must first transfer assets into the trust, trust assets held in the trust are then managed by the trustee, before being passed along to the trust’s beneficiaries in accordance with your precise wishes.
This type of legal arrangement is an effective estate planning tool since only your named beneficiaries are granted access to the trust assets.
In this way, you negate the need for a lengthy probate process and saved your loved ones the distress of having to go to probate court, instead, your assets are passed along with as little friction as possible.
In addition, using a trust as part of your estate plan also potentially helps you minimize estate taxes.
Indeed there are potentially multiple tax benefits in using a trust in this way, depending on exactly where and how you establish your estate plan trust.
Revocable and irrevocable trust – main differences
Trusts are highly effective and flexible estate planning tools which can be set up in different ways but the main two types are revocable and irrevocable trusts.
Although there are a few subtle differences between a revocable trust and an irrevocable trust, and various variants thereof, the main over-arching difference between a revocable trust and an irrevocable trust is the ability to make changes to your trust after it has been established.
Revocable trusts are a form of trust which are, as the name suggests, revocable.
So in other words, a revocable trust is a form of trust which can be amended at any time.
They are sometimes referred to as a revocable living trust, as they allow you to make changes to it while you are alive (and assuming that you are of sound mind and body, obviously.)
Once you place the assets into the trust, they become the property of the trust. Revocable trust assets are then held in trust for their eventual transfer to the trust’s beneficiaries and, after your death, the trust cannot be altered in any way will instead be managed according to your wishes.
An irrevocable trust, as its name suggests, is the opposite of the above type of trust.
The main selling point (or disadvantage, depending on how you look at it) of an irrevocable trust is a trust that, once formed, cannot be changed. You create the trust, transfer your assets and then, once the process is completed the trust is, essentially, set in stone.
Irrevocable trusts are therefore quite popular for estate planning because they cannot be meddled with afterwards, even while you are alive.
More importantly, once your assets are part of the trust, they are no longer considered part of your estate. This means that creditors cannot come after those assets, since they are no longer your assets, and neither can the taxman, for that matter.
So, for US citizens, for example, if the value of the assets in the trust is worth more than the federal estate taxes exemption, you can avoid estate taxes by using this structure. After all, you cannot pay federal estate tax on assets that are not part of your estate.
Revocable vs Irrevocable Trust – Which Is Better?
So, although it’s fair to say an irrevocable trust is potentially better from a tax point of view, the dangers of an irrevocable trust are clear to see.
With an irrevocable trust, you have the potential to avoid federal estate tax but then at the same time, you lose total control of the trust and its assets once created.
So let’s say you want to make changes further down the line, perhaps leave some of your assets to somebody else, well once the trust has been formed, you can’t do that anymore.
With family, and indeed with life in general, things can change. People are born, people die, people get married, they get divorced, things change.
You might be in love today, and decide you’re going to give all your money to that person when you die. But who knows, maybe that person ends up being the person you curse with your dying breath. And they inherit it all anyway.
Revocable Trust vs Irrevocable Trust
- A revocable trust can be easily altered, an irrevocable trust cannot
- A revocable trust provides minimal asset protection, an irrevocable trust offers tougher asset protection
- A revocable trust provides no tax advantages, an irrevocable trust offers estate tax reduction
Of Course, It’s About More Than Just Saving On Estate Taxes…
Safeguarding your trust assets and avoiding estate tax are two reasons to choose an irrevocable trust, but why would you want to compromise on flexibility?
Setting up a trust allows you greater control over how your property and assets are dispersed after you die, but for complete control, and less danger from outside interference, the best option is to use an offshore trust.
By going to a tax-friendly offshore jurisdiction you also don’t have to worry about estate taxes, or any other taxes for that matter. You also have far more robust protection offshore than you would with a domestic trust, not to mention more privacy and more flexibility. Plus it’s an ideal first step if you plan on also opening an offshore bank account.
The only reason more people don’t do this is because going offshore can seem needlessly complicated to the uninitiated, so they miss out on the various benefits and instead decide to go with what they know.
But as a Nomad Capitalist client, we can help you with all your estate planning needs. We can help you create a comprehensive estate plan which also incorporates tax savings and enhanced asset protection giving you complete control. Contact us today to learn more.
Revocable and Irrevocable Trusts FAQ
A revocable trust is a type of trust which you can still alter once the trust is formed. With a revocable trust, you can transfer assets and name beneficiaries as with any other trust. But you can make changes to the trust as long as you are alive.
A living trust is another name for a revocable trust, or sometimes also called a revocable living trust.
The reason for the name is because living trusts are revocable for as long as the settlor is alive. So you even after you form the trust and transfer to it, you can still make changes as long as you are living, including naming new beneficiaries, adding new assets or changing the recipients of various assets.
An irrevocable trust is a type of trust which, once formed, cannot be altered after. Irrevocable trusts are often used for the purposes of estate planning as they have estate tax benefits.
An irrevocable life insurance trust (ILIT) is a form of irrevocable trust used for estate planning purposes which can be tied to a life insurance policy.
As with a regular irrevocable trust, it has notable estate tax benefits however once the trust is formed, it cannot be altered so trust property and assets held in the trust will go to whatever beneficiaries are chosen at the beginning.
A testamentary trust is a type of trust which is used for estate planning. You can set up this type of trust as part of your last will and testament, and the trust will not be active until after you have passed. The trustee will then take over the administration of the trust and its assets on behalf of the beneficiaries.