Differences Between Revocable and Irrevocable Trusts

Wealth Advisor

In this informative video, Jamison Smith, a wealth advisor at EWA, delves into the intricacies of estate planning and the role of trusts, specifically highlighting the differences between revocable and irrevocable trusts.

The video begins by elucidating the concept of a revocable trust, emphasizing its malleability during the grantor’s lifetime, which allows for adjustments and changes. It is ideal for those who desire control and flexibility over their assets while they are alive. Importantly, upon the grantor’s passing, a revocable trust can transform into an irrevocable trust, providing posthumous asset protection and control over distribution.

Jamison enumerates the advantages of revocable trusts, such as flexibility, probate avoidance, privacy, and the capacity to shield heirs from creditors and divorce. However, it is highlighted that revocable trusts do not offer immediate tax benefits or asset protection during the grantor’s lifetime.

In contrast, irrevocable trusts, once established, are challenging to amend and necessitate the consensus of the trustee and all beneficiaries for any alterations. The video underscores the advantages of irrevocable trusts, including potential tax benefits, asset protection for the grantor during their lifetime, and Medicaid spend-down benefits due to assets being excluded from the grantor’s balance sheet.

Drawbacks of irrevocable trusts are also outlined, encompassing higher tax rates on trust income, additional tax filings, and complexity. The choice between revocable and irrevocable trusts hinges on variables such as net worth, control preferences, and estate tax considerations.

For individuals with substantial estates, irrevocable trusts may yield tax savings by facilitating annual gifting into the trust. The selection of assets held within the trust is deemed crucial, with the video advising against including assets with substantial dividend yields or capital gains.

Ultimately, the decision regarding the type of trust to employ in estate planning should be aligned with an individual’s unique financial situation and objectives. The video underscores the importance of seeking professional guidance for tailored estate planning solutions.

Video Transcript

Hi, I’m Jamison Smith, a wealth advisor with EWA, and in this video I’m going to explain everything that you need to know about utilizing a trust within your estate plan. There are many different kinds of trusts that can be implemented in your estate planning, but in this video I’m going to focus on the two most common and the differences between a revocable and an irrevocable trust.

Which one is the better option will depend on your financial situation in your specific estate planning goals. The first one a revocable trust. Just as the name states. This can be revoked, meaning it can be changed or updated at any time while you are still living.

This is also known as a Revocable Living Trust, and this can be a great option if you want to establish a trust but want to have complete control over your estate and the assets while you are still alive.

Upon death, a Revocable trust can become irrevocable, meaning it can incorporate protections that you want in place after you pass. Some of the benefits would be that it’s flexible, you have the ability to amend it while you’re still living.

It avoids probate and provides privacy compared to assets going through the probate process and could be public record. Money is still available while you are living. If you set this up to spring into an irrevocable trust for children, it can be creditor and divorce protected once you pass.

Depending on the specific state law can also preset rules around distribution and when beneficiaries can access the money. Some of the disadvantages would be that there’s no real tax benefit since it’s still included in the estate and there’s no asset protection while you are still living.

Any assets held inside an irrevocable trust while living are still included on your balance sheet for Medicaid spend down purposes when trying to get approved for aid from the government. In the case of a long term care event, an Irrevocable trust, as the name states, cannot be changed or amended easily.

Very few instances that allows changes, but in most cases, trustee and all beneficiaries must approve any changes that you would want to be made. Advantages would be tax Benefits assets held in the trust are not incorporated within your estate and could save you 40% on federal estate taxes if you’re over the exemption asset protected while you’re a living.

And since the trust owns the assets, they’re not on your balance sheet. When trying to qualify for government benefits like Medicaid, some of the disadvantages they’re subject to higher tax rates. Income generated is taxed separate from you and generally at a much higher rate than your individual rate.

They have to file an additional tax returns. This can be complex and pretty hard to understand sometimes, but what’s right for you? This depends on your net worth, your goals. If you want to maintain control, then generally a revocable trust is better.

If you have a larger estate, an irrevocable trust can help save you on estate taxes by using this as a mechanism to gift into it each year. It’s important to consider what assets you do hold within the trust.

As of 2021, if your income is over $13,050 within the trust, it’s taxed at 37%. So you don’t want to hold assets that have dividends or capital gains. Avoid things like corporate bonds and dividend paying stocks.

Life insurance and growth stocks are the most tax efficient assets to hold inside of an irrevocable trust. If you have any specific questions about your estate planning situation, feel free to reach out and we’re happy to help.

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