When it comes to estate planning, two of the most commonly used tools are revocable and irrevocable trusts. These trusts are designed to take effect during your lifetime. This provides you with a little peace of mind when you're planning your estate. Both types guarantee that the assets in the trust will be protected and distributed properly after your death (according to the guidelines and limitations you laid out). However, these two types of trusts are not the same, and you need to understand what the differences are so you and your estate planning attorney can choose the one that's right for you.
What They Are
When you establish a trust, you as the grantor are creating the trust document. With a trust, a trustee is designated who is assigned the task of distributing the estate to the beneficiaries upon your death. If you choose a revocable trust, the terms of the trust can be modified by you at any time prior to your death. However, a revocable trust becomes and irrevocable one following the grantor's death.
On the other hand, if you choose to create an irrevocable trust, you (the grantor) cannot later modify this trust. What you will have done is transferred your estate and assets to a trustee who will manage the property on behalf of the beneficiaries. This means that you no longer own these estate properties and can't make any changes to the trust without the consent of the beneficiaries.
The major difference between these two types of trusts is how taxes are handled. Since any properties or other assets that are placed in an irrevocable trust no longer belong to your estate, the death tax will no longer apply to them. But if you choose to establish a revocable trust, this will still be subject to the death tax. In short, irrevocable trusts provide grantors with a tax advantage that revocable trusts don't. It's important to note that if the value of your estate is well below the federal government's estate tax exemption, there's no need to concern yourself with the tax advantages of one type of trust versus the other.
Pros and Cons
One problem with the revocable trust is that it does require a great deal of organizing on your part, since you're going to have to continually update the trust with regard to any new assets. And you'll have to retain professional services whenever you have to file these changes. You are also required to retitle properties (such as the title for your home), which can add to the difficulty and expense. From this perspective, irrevocable trusts are preferable because of the ease with which they can be managed. The only major drawback to an irrevocable trust is that you lose any flexibility to make changes once it's established.