Differences Between Revocable and Irrevocable Trusts

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.