For estate planning purposes, there are various types of trusts; the most common are revocable and irrevocable. These two major categories of trusts have distinct purposes for your estate plan, despite some similarities. In addition to a will and trust, both can be used to distribute the property as an alternative to a last will and testament, though they often exist simultaneously. Your estate plan should depend on whether a revocable or irrevocable trust is best for you.
The most striking difference between the trust types is as defined in the names. A revocable trust permits changes, amendments, and revocations at any time while you are alive and mentally capable of doing so. In contrast, an irrevocable trust does not permit amendments or revocations of any type while you are alive. The only changes to the terms of the trust are as the trust agreement itself defines and allows.
Both trusts, when properly implemented, permit the bypass of the probate process. A revocable and irrevocable trust will survive your death, and your named successor trustee will be able to distribute trust property free from court interference after you die. The trustee may only distribute assets that the trust owns in title to avoid probability.
Why seek to avoid probate? The process is slow and time-consuming, taking anywhere from six months but in most instances one to three years to complete. Although it varies by state, probate can be costly as the court takes a portion of the gross estate in probate fees even before the deceased’s debts are paid. The fee can be as substantial as ten percent. Finally, probate is a public process, and all documents and information will become part of the public record. Estate debts and assets become public records, as are the distributions of assets. Anyone who cares to look up this public record can know which beneficiary received what and often make targets of inheritors for frauds or burglaries.
Both trust types help you control property after you die with conditions you outline as to how to use trust assets once you pass away. Conditions are usually age restrictions, punishments for unruly behavior, and incentives to promote good behavior. These conditions must not violate public policy. Revocable and irrevocable trusts can set up conditions regarding distribution while you are alive. However, in a revocable trust, if you create the trust, control the trust as trustee, and are the trust beneficiary, you will NOT receive protection from creditors or others who may have a claim against you. This lack of credit protection in a revocable trust is significantly different from an irrevocable trust.
An irrevocable trust can prevent the distribution of assets to certain entities or people, like a long-term care facility or a creditor. The irrevocable trust must be in place and active before protection from the debt accrued to be effective or be within certain time limits to qualify for government programs such as Medicaid. The irrevocable trust creates a legal wall separating you and your assets permitting the shielding from creditors or long-term medical care costs. Asset protection is one of the most useful aspects of an irrevocable trust.
An irrevocable trust is also a vehicle to shield your multi-million-dollar wealth from excessive federal estate taxes to preserve generational wealth. 2022 tax exemptions include:
- $12,060,000 federal estate tax exemption with a 40 percent top federal estate tax rate
- $12,060,000 Generation-Skipping Transfer (GST) tax exemption and a 40 percent top federal GST tax rate
- Lifetime gift tax exemption is $12,060,000 and a 40 percent top federal gift tax rate
- An annual gift tax exclusion amount increases to $16,000
In summary, both trust types can provide estate planning benefits depending on your needs.
Revocable Trust
- Permits control of your assets, their distribution, and how they are spent after you pass
- Permits bypassing the probate process
- Limits probate if you have properties in multiple states and want to avoid probate in each state
- You desire to simplify the distribution of your property to your heirs and children when you pass away.
Irrevocable Trust
- Permits control of your assets, their distribution, and how they are spent after you pass
- Permits bypassing the probate process
- You have concerns about future long-term medical costs
- You have implicit trust in your children or other family members to take care of your property
- You want to preserve generational wealth by protecting your assets from creditors or long-term care facilities
- You want to protect your assets from potential future lawsuits
- You want to limit federal estate taxes on your estate
Trust types in estate plans are as varied as those individuals seeking to enact them. To best protect your interests and those of your beneficiaries, meet with a qualified estate planning attorney who can explain the type of trust that best suits your needs. Please Contact our Chicago area offices by calling 312-878-0155 to schedule an appointment.