Revocable vs. Irrevocable Trusts: Understanding the Key Differences and Benefits

Creating a trust is one of the most effective ways of managing your assets during your lifetime and planning for what happens to them when you pass away. Trusts offer flexibility and can be tailored to meet your needs and goals. Here’s a more comprehensive article on the benefits of revocable living trusts under NY law.

Trusts are available in two primary flavors: revocable and irrevocable. Each serves distinct purposes and offers unique advantages for different situations. Let’s break down the benefits and differences between both trusts to help you make an informed decision.

What is a Revocable Trust?

A revocable living trust is a legal arrangement created during a person’s lifetime to hold and manage their assets. It is the most flexible type of trust you can set up, as it allows you (the grantor) to modify, amend, or dissolve the trust at any point in your lifetime, as long as you are not incapacitated. Typically, the grantor appoints a successor trustee to take over the management of the trust when they become unable to do so. A revocable living trust becomes irrevocable when you pass away, so it cannot be changed or revoked in your absence. At this point, your successor trustee can only distribute the assets according to your instructions.

Benefits of Revocable Trusts

The biggest talking point of revocable trusts is their flexibility and ease of administration. They allow you to:

• Maintain complete control over your assets while living
• Avoid probate, saving time and money for your beneficiaries
• Modify beneficiaries, trustees, or distribution terms as needed
• Create a seamless transition of asset management if you become incapacitated

What is an Irrevocable Trust?

An irrevocable trust is a type of trust that, after it’s been set up, is generally very difficult to alter. Like in a revocable trust, you transfer your assets into the trust. But once those assets are in an irrevocable trust, you lose much control over them. Making changes to this type of trust typically requires the agreement of both the trustee and all the beneficiaries, or you’d have to get a judge’s permission.

Benefits of Irrevocable Trusts

Though less flexible, irrevocable trusts still offer powerful benefits, such as

• Protection from creditors and lawsuits
• Potential estate tax reduction
• Medicaid planning advantages
• Special needs planning options
• Income tax benefits in certain situations

Making The Right Choice

Revocable trusts offer little in the way of tax benefits during your lifetime. The assets within a revocable trust are still considered part of your estate and are subject to estate taxes. However, they can help avoid probate, which can be a significant advantage.

Irrevocable trusts, on the other hand, offer several potential tax benefits. Since the assets are no longer in your name, they might not be subject to estate taxes, which is a massive advantage for high-net-worth individuals. Also, assets in an irrevocable trust are usually safe from creditors, which is especially important for those in high-liability professions.

Remember that the specific tax and asset protection benefits can be complex and vary based on individual situations. Consulting with an experienced estate planning attorney is what you need to obtain the best results. Feel free to call the Law Offices of Roman Aminov; let’s analyze your situation, understand your goals, and determine which type of trust is right for you.