When it comes to estate planning, one must navigate various options to safeguard assets and ensure their distribution according to their wishes.
Two common tools in this realm are revocable and irrevocable trusts. These trusts serve distinct purposes, each with its unique characteristics and implications.
Control and flexibility
One of the primary differences between the two trusts lies in the control and flexibility they offer. A revocable trust allows the grantor to make changes or even revoke the trust at any time during their lifetime. Irrevocable trusts, on the other hand, require the consent of beneficiaries for altering or revoking.
Asset protection
Asset protection is another aspect to consider. In a revocable trust, your assets remain within your control, but they are also vulnerable to creditors and legal claims. In contrast, irrevocable trusts provide a higher level of asset protection. Once assets go into an irrevocable trust, they are no longer part of your estate, making them less susceptible to legal actions.
Estate taxes
Estate taxes are a concern for many when planning their legacy. Revocable trusts do not offer any estate tax benefits because the assets are still part of your estate. Irrevocable trusts can provide substantial estate tax advantages. After transferring assets into an irrevocable trust, they may no longer be subject to estate taxes, reducing the tax burden on your beneficiaries.
Privacy
Revocable trusts are typically subject to probate, a public legal process that can expose your financial affairs to the public. In 2021, New York courts had 42,417 probate filings. In contrast, irrevocable trusts often bypass probate, maintaining a higher level of privacy for your estate.
Understanding the distinctions between revocable and irrevocable trusts is important when planning your estate. Deciding which trust is best for your specific circumstances requires careful consideration.