Individuals and families frequently use trusts as an estate planning tool. A trust is a legal structure in which a person can place their assets under the management of a trustee, who must manage the assets per the terms of the trust document. The trust document may allow a trustee to distribute income or principal from assets to designated beneficiaries. Trusts come in two basic types: revocable and irrevocable. A knowledgeable estate planning lawyer can help understand the advantages and disadvantages of revocable and irrevocable trusts in Texas.
Understanding Revocable Trusts
A revocable trust gives the settlor – the person who creates the trust – the ability to modify or revoke the trust at will. This flexibility allows a settlor to change beneficiaries or trustees, alter the provisions under which the trustee must manage the trust, or revoke the trust and recover the assets the settlor placed in the trust. Thus, revocable trusts allow settlors to retain control over the assets they place in the trust. People frequently use revocable trusts as an alternative to probate to pass their wealth to loved ones after their deaths, as putting assets in a trust removes those assets from a person’s probate estate.
Understanding Irrevocable Trusts
An irrevocable trust becomes fixed once a settlor creates the trust. The settlor may not change the trust’s terms or revoke the trust. The law only permits changes to irrevocable trusts in limited circumstances. People typically use irrevocable trusts as a form of asset protection to preserve assets from creditors or lawsuits or to reduce the size of one’s estate to qualify for means-tested government benefits like Medicaid. Irrevocable trusts can also reduce the size of a person’s estate for estate tax purposes.
Key Differences Between Revocable and Irrevocable Trusts
Revocable and irrevocable trusts have numerous differences. Some of the most significant differences include:
- Control: Revocable trusts allow settlors to retain ultimate control over the assets they place in the trust since they can revoke the trust at any time and recover those assets. Conversely, a settlor gives up control over the assets they place in an irrevocable trust.
- Flexibility: Revocable trusts give settlors more flexibility as they can amend the trust’s terms anytime. Conversely, settlors and beneficiaries can change the terms of an irrevocable trust only in limited circumstances.
- Asset protection: Revocable trusts offer limited asset protection since a settlor retains access to the assets in a revocable trust. Thus, those assets remain available to the settlor to satisfy debts or other liabilities. Conversely, individuals and families prioritizing asset protection will use irrevocable trusts since the law generally prohibits creditors from accessing trust assets until a trust distributes those assets to beneficiaries.
- Tax consequences: Irrevocable trusts can lower estate taxes; however, the law considers assets in a revocable trust as remaining in the settlor’s estate, making the estate liable to pay taxes on those assets.
Choosing a Suitable Trust
Determining whether to choose a revocable or irrevocable trust for your estate planning needs requires an evaluation of various factors, such as:
- The need to protect assets from creditors or potential legal liability
- Preferences for maintaining control over trust assets or management of the trust
- The importance of minimizing taxes
- The goals for the trust, such as protecting loved ones’ inheritances, providing for a loved one with special needs, or qualifying for Medicaid
Contact an Estate Planning Lawyer Today
When considering adding a trust to your estate plan, an experienced lawyer can help you understand the differences between revocable and irrevocable trusts and which form you should choose for your estate planning needs. Contact Carroll Law Group, PLLC, today for a confidential consultation with our legal team to discuss your options.