Choosing between revocable and irrevocable trusts

Options like revocable and irrevocable trusts are hardly new in estate planning. However, confusion may remain over which option is best for certain needs.

As a preliminary matter, the estate tax exemption is so high -- about $10.6 million for married couples -- that estate planning simply for the purpose of protecting estate taxes has become a non-issue for many couples. However, there are other tax savings that a trust can provide, not to mention that trusts generally avoid the expense, delays and privacy invasion often associated with probate.

From a tax perspective, the Internal Revenue Service will generally not recognize as separate any assets over which the grantor retains control. In the case of a lifetime revocable trust, the assets can be encumbered, withdrawn, reallocated, or the entire trust can be modified or even revoked at the grantor’s whim. In other words, the grantor usually serves as trustee of a lifetime revocable trust and retains complete control over the assets. Consequently, he or she will not reap tax savings simply by putting assets into that type of trust.

In contrast, an irrevocable trust usually has a trustee who is separate from the grantor. Since the trustee, rather than the grantor, has control over those trust assets, there could be a tax savings. The downside is that it can be difficult to amend or change the terms of this trust, in the event that the grantor does not agree with the trustee’s judgment.

In both instances, however, the grantor has the advantage of setting up a legal instrument that provides for how assets will be managed in the event of incapacitation, or distributed in the event of death. That type of advance planning can provide peace of mind.

Source: U.S. News & World Report, “How to Choose Between a Revocable and Irrevocable Trust,” Joanne Cleaver, June 19, 2014