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Revocable Vs. Irrevocable Living Trusts

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By Igor Krishtul, ChFC, EA

Setting up a trust is an important decision. Properly designed trusts can help you achieve goals not possible otherwise. Trusts may provide additional levels of protection. They may also be the most flexible tool to own your property.

But, each individual is unique and has different goals and financial situation. Also, things don’t always stay the same. As they change, your financial and estate plan may have to be adjusted.

It may become desirable on your part to make changes related to your living trusts. Whether or not this is possible depends on the types of trusts you set-up.

Revocable living trusts are ones that can be revoked. In English, it means that you can change or even terminate your trust altogether. The term “revocable” does not refer to any one specific trust. Rather, this is a type of arrangement that includes many different types of trusts.

Let’s say you set-up a trust for your children when they were small. Now, they are out of school and make a good living. You, on the other hand, are no longer working and can use additional cash. If your trust is revocable, nothing can stop you from using your trust assets. You can also withdraw everything and open an account in your name.

How do you make your trust revocable? That’s not hard to do. Just make sure your trust document clearly says so. In many states, your living trust will be considered irrevocable, unless you clearly state otherwise.

Assets in revocable living trusts are not subject to probate. At the same time, you can retain the full control over your property during lifetime. When the grantor dies, a revocable trust becomes irrevocable.

Irrevocable trusts are ones that cannot be revoked. This should be obvious, right? Once you transfer your assets to such trusts, you lose control over them. There are situations when you can still have an influence over the trust property. But, let’s make it very clear – money and other property in irrevocable trusts no longer belong to you.

Once you sign the trust documents, all provisions specified in your trust document are fixed. You cannot change anything. Nor can you remove any property from the trust.

Now, why would anyone voluntarily lose control over the property? Remember, some people transfer huge sums of money and other property to such trusts. Well, these trusts may come with significant benefits.

Many good things in life come at a price. This price includes resources, time and sacrifices. Not being able to revoke your trust is the price you've got to pay in exchange for potential rewards.

Irrevocable trusts offer two major benefits. One of the benefits involves tax savings. Another major benefit involves an additional level of protection against creditors. In both cases, the potential savings may be high enough to justify losing control.

Just as with revocable trusts, the term “irrevocable” does not refer to any one specific trust. There are many types of irrevocable arrangements aimed at accomplishing different objectives.

Revocable or not, assets in your living trusts avoid probate after death. Just as with the last will and testament, you can provide for distribution of assets to beneficiaries. Your will, however, is a public document. Also, property passing to heirs through a will must be probated. Living trusts also offer additional privacy.

You are not limited to having only one living trust. You may set-up separate revocable and irrevocable trusts. Each trust may be designed to accomplish different objectives during life and after death.

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