As an attorney who routinely advises clients on estate planning, I often get asked: “What kind of trust should I use?” It’s a great question, and the answer is not one-size-fits-all. It depends greatly on individual motivations, circumstances, and types of assets involved, and choosing the right trust is something that requires discussion and counseling from an attorney who handles this kind of work.
Today, let’s delve deeper into the two primary types of trusts – revocable and irrevocable – and weigh their pros and cons. Keep in mind that a detailed consultation with an estate planning attorney is vital to making the right decision for your unique situation, and “revocable” and “irrevocable” are broad categories that do not capture all of the different strategies that can be incorporated into a given trust. In fact, some of our clients form both revocable trusts and irrevocable trusts, funding their assets into one or the other to accomplish different goals. In the broadest sense, I view revocable living trusts, when paired with a will, as the best general estate planning vehicle for most families. However, irrevocable trusts are necessary when clients have special desires and needs, such as protecting assets from potential lawsuits, planning to qualify for government benefits like Medicaid, or strategically reducing the size of your estate to mitigate estate tax exposure.
Revocable Trusts: The Pros and Cons
A revocable trust, also known as a living trust, offers flexibility and is often chosen as a means to organize your assets in a way that reduces the chances of your family having to go through a court process to transfer assets or resolve a conflict. As the name suggests, the trust is “revocable” or easily amended. You retain full control over the assets as long as long as you live and have the mental capacity to do so, and the trust only becomes irrevocable when you (the trustmaker/grantor) die.
Pros of Revocable Trusts
- Flexibility: Revocable trusts can be changed or revoked at any point during your lifetime, providing adaptability to changing circumstances.
- Avoiding Probate: Assets held in a revocable trust bypass the often time-consuming and costly probate process.
- Guardianship Proceedings: Revocable trusts can also help avoid potential guardianship or conservatorship proceedings if you become incapacitated, particularly if your assets are properly funded, and your trust contains well-defined triggers for when a successor trustee would manage your assets.
- Step-Up in Basis: Revocable trusts usually preserve a step-up in basis for assets that appreciate in value, such as real estate, potentially saving beneficiaries significant capital gains taxes if they sell the property after you die.
- Flexible Estate Tax Planning for Married Couples: At the time of this article, the Federal Gift/Estate Tax Exemption is $12,920,000.00, and the State of Georgia does not have an estate or gift tax of its own. Therefore, most of our clients do not worry too much about having a taxable estate. However, tax laws might change before you die, or your assets could appreciate in value, and a revocable trust can build in flexibility that allows a married couple to maximize each spouse’s exemption amount to effectively double the amount of assets that can be left to beneficiaries estate tax free. Unlike with irrevocable trusts, you don’t have to give up any control of your assets while you live to maximize each spouse’s exemption amount, but you do have to have a plan to do this.
Cons of Revocable Trusts
- Estate Tax Implications: Assets within a revocable trust are still part of your taxable estate, which could lead to estate taxes if your estate exceeds the estate tax exemption. However, the estate tax exemption is $12,920,000.00 right now, so most people won’t be harmed by estate taxes anyway. If you do have a particularly high net worth, a revocable trust may still be useful to manage assets not put in an irrevocable trust.
- Lack of Asset Protection: Revocable trusts offer little protection against creditors since you retain control over your assets. In other words, because you control the assets, your creditors have just as much right to attack your revocable trust assets as they would if you owned them personally. However, revocable trusts can provide asset protection in the form of avoiding conservatorship proceedings if you become incapacitated, and they can protect assets for beneficiaries after you die, assuming your trust is designed for these purposes.
Irrevocable Trusts: The Pros and Cons
Irrevocable trusts offer less flexibility than their revocable counterparts but provide considerable advantages in terms of asset protection for people in high-risk occupations or elders who want to protect their assets against long-term care costs. They can also be a tool for high-net-worth families to limit estate tax exposure. In other words, irrevocable trusts can be used for numerous purposes, but asset protection, special needs planning, or estate tax planning are probably the most common ones.
Pros of Irrevocable Trusts
- Asset Protection: Assets within an irrevocable trust are generally safe from creditors and lawsuits of you personally. However, the timing of when assets are funded to the trust is crucial. For instance, irrevocable trusts are often used in Medicaid planning, but, for the trust to serve its purpose in Georgia, assets must be transferred to the trust at least 60 months before applying for Medicaid. Furthermore, irrevocable trusts can be a good tool for doctors, loggers, or people in other high-risk professions to protect their assets from lawsuits, but the assets generally need to be in an irrevocable trust before a liability arises. Transferring assets to a third party or a trust to avoid a specific liability after the liability or lawsuit arises is often considered fraud and might be set aside, so proactive planning is important.
- Estate Tax Benefits: By removing assets from your estate, an irrevocable trust can be a tool to significantly reduce or eliminate estate taxes, but of course it’s not so simple. The trust by itself does not reduce estate taxes, but the way it is drafted and actually funded can. Timing is important as well as choosing the types of assets to fund into an irrevocable trust, and you need to have a funding plan that considers several factors which are beyond the scope of this article.
Cons of Irrevocable Trusts
- Lack of Flexibility: Once an irrevocable trust is established, altering its terms or reclaiming assets can be challenging or impossible, potentially making it less attractive to those who prefer control over their property. Even for people for whom I draft irrevocable trusts, I rarely advise that they put all of their assets in the irrevocable trust – most people want full future control over at least some assets.
- Possible Ineligibility for Government Aid: If not carefully structured, certain types of irrevocable trusts could affect eligibility for government assistance programs. Many people assume the wrong things because they believe an irrevocable trust will do everything they want it to. When drafting an irrevocable trust, choices have to be made to sacrifice some things in favor of others. This is why your goals need to be communicated to your attorney so that, if possible and safe, they can counsel you on a plan and draft a trust that reasonably satisfies your goals with you having an understanding of what you’re giving up. You can’t always have your cake and eat it, too.
Personalized Legal Guidance
While these general pros and cons of revocable and irrevocable trusts provide a starting point, the right choice depends on your unique circumstances, future goals, and nature of your assets. An experienced estate planning attorney can educate you so that you can make the most beneficial decision. This blog is just intended to provide general information and is not legal advice intended for you to rely upon.
At Bryant & O’Connor Law Firm, we pride ourselves on offering personalized and empathetic legal counsel to navigate these complex decisions. We understand that no two cases are alike, and we’re here to ensure your unique needs are addressed effectively. If you want to get clarity on your planning goals, call our office and find out how you can schedule a planning session at no cost. Assuming you do the homework we ask and come to your scheduled meeting, you’ll only pay us for estate planning if we offer a plan that you decide has great value for you.
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