A trust can be a great planning tool, but it’s important to know the difference between a revocable versus an irrevocable trust.
One of the most popular strategies for passing assets from generation to generation is with the help of a trust.
“One benefit of having a trust is avoiding probate,” said Robert Siuty, a senior financial consultant at TD Ameritrade. “A trust spells out the wishes of the grantor and provides some degree of control beyond the grave.”
Before you decide to set up a trust, though, it’s important to understand the difference between two of the most common types: revocable and irrevocable trusts. (You may have also heard the term “living trust,” or in lawyer-speak, the Latin inter vivos. That simply means the trust was made during your lifetime.)
According to Siuty, the main difference between a revocable trust and an irrevocable trust is just what the words imply. A revocable trust is one that you can “take back” later. You can also make changes to the way it works. An irrevocable trust, on the other hand, can’t be altered once it’s in place. You’re stuck with it, and there are quite a few other restrictions that come with an irrevocable trust.
However, an irrevocable trust might also come with some benefits, such as asset protection, that might not always be available with a revocable trust.
Most living trusts are set up as revocable. A revocable trust is still part of the estate, Siuty explained.
“The assets are still owned by the grantor of the trust and can be removed,” he said. “It’s possible to make changes to how beneficiaries receive the money.”
On the other hand, Siuty warned, a revocable trust is also subject to litigation. Because the assets can still be controlled by the grantor, creditors and others can come after the assets later.
Setting up a revocable trust can be a valuable strategy for estate planning and provide a way to manage assets in a way that can benefit your heirs in the future. It allows you to maintain a high level of control, meaning you can make changes to the trust as needed. Some grantors also appreciate that it’s possible to remove assets from a revocable trust at a later time, which can make it easier to respond to changing financial situations or changing family dynamics.
An irrevocable trust, as its name implies, can’t be changed once it’s in place.
“An irrevocable trust gets the assets out of the estate. They’re no longer owned by the grantor; they’re owned by the trust,” said Siuty. “It’s a way of protecting assets for beneficiaries and offers more protection from a litigation standpoint.”
Another consideration with an irrevocable trust is that, although you can dictate how you want the assets to be used when you set up the trust, you can’t change things later. And you can’t be a major beneficiary of the trust. Some states allow you to provide income to meet your living needs, but for the most part, you won’t be able to control the trust or be a major beneficiary once you establish and fund it.
“You have a lot less control with an irrevocable trust,” Siuty pointed out. “But depending on your goals and needs, it can still make a lot of sense.”
Consider carefully which assets you want to include in the trust and which you might keep out. That’s because once the assets are turned over to an irrevocable trust, they’re no longer technically yours. Depending on the situation, it might not make sense to put everything in the trust.
Whether you use a revocable or irrevocable trust, there are some benefits that might come from using trusts as part of your estate planning, according to Siuty:
If you decide you want to use a trust as part of your estate planning or gifting strategy, Siuty recommended sitting down with a knowledgeable estate planning attorney who can help you understand the pros and cons of a revocable versus irrevocable trust. A good attorney can also help you structure your trust in a way that fits your goals and your situation.
“In some cases, a trust can be a great way to prevent the value of your estate from being eaten up, while making sure your legacy continues,” said Siuty. “It’s worth looking into to see if it’s right for you.”
Perhaps the most common misperception about trusts—and estate planning in general—is that trusts are just for the wealthy. It’s true that for the 2020 tax year, an estate tax filing is required only on estates valued above $11.58 million, but tax laws have been known to change. Besides, who wouldn’t want to have at least some control over how their assets are dispensed after they die?
Plus, estate planning is a way to set clear goals—for yourself, for your loved ones, and for your favorite charities—on your own terms. One place to start is with the estate planning checklist below.
Use this checklist to help make sure your estate plan wishes are known and necessary documents are in place.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.