The Differences Between A Revocable And Irrevocable Trust
Trusts are one of the most common tools used in estate planning to protect assets, bypass probate, and ensure that your loved ones are provided for after your passing. There are revocable and irrevocable trusts, and each comes with its own benefits and drawbacks. Understanding the differences between these options can help in the planning of your estate, and the experienced Franklin estate planning & probate attorneys at Fort, Holloway & Rogers are here to help. Call the office or contact us today to learn more.
One of the first major differences between revocable and irrevocable trusts is the ability to terminate or amend the trust. A revocable trust allows the person who created the trust (referred to as the “grantor” or “settlor”) to terminate the trust and recover any undistributed proceeds up until the moment of death of the grantor. The grantor can also amend the trust. An irrevocable trust cannot be terminated or modified once it is created without court approval or the trust terminating pursuant to the terms of the trust.
Ownership of Assets
Another difference between revocable and irrevocable trusts is who owns the assets within the trust. When property is transferred to a trust, it becomes owned by the trust. However, because the grantor of a revocable trust can change the assets at any time, ownership of the trust assets can be reverted back to the grantor minus any assets that have already been distributed to a beneficiary by the terms of the trust. With an irrevocable trust, once the assets are transferred they become the property of the trust and the grantor no longer has any ownership interest.
A third difference between revocable and irrevocable trusts is the level of asset protection provided by each instrument. In a revocable trust, the grantor retains complete control over the assets of the trust. Because of this, the assets in a revocable trust are not protected from creditors of the grantor for debts and other liabilities. However, an irrevocable trust protects the assets in it from any creditor claims against the grantor. The grantor’s creditors are limited to only receiving assets of the irrevocable trust if the terms of the trust distribute assets to the grantor. An irrevocable trust protects the assets for future beneficiaries, ensuring that the actions of the grantor will not affect their inheritance.
Another difference between trust types is the tax implications for each. While Tennessee does not have a state estate tax, depending on the size of the estate it could be subject to federal estate taxes. Because the assets of a revocable trust can be added or removed at will, an inter vivos trust does not provide protection against estate taxes. The value of the assets in a revocable trust are considered when calculating the total value of an estate for federal estate tax purposes. However, any assets placed into an irrevocable trust are not counted towards the total value of an estate when calculating federal estate taxes because the grantor relinquished the rights to those assets when they were added to the trust.
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Do you wish to learn more about revocable and irrevocable trusts for your estate plan? Call the office or contact us today at Fort, Holloway, & Rogers to schedule a consultation to learn more.