Cleveland, Ohio Trust Attorney
What is a trust? What is the difference between a revocable trust and an irrevocable trust? Why might my estate plan include either one?
Simply put, a trust helps manage your assets and provides clarity for the future. A trust is a tool that may be used to achieve your financial goals. There are different types of trusts for specific situations, from special needs trusts for family members with disabilities to charitable trusts that allow charitable giving while maintaining income as needed. Trusts also fall into the categories of revocable (or living) trusts and irrevocable trusts.
Differences between a revocable and irrevocable trust
- Changes or modifications
An irrevocable trust generally cannot be changed or modified under any circumstances, whereas a revocable trust can be modified or revoked at the discretion of the Grantor. However, the Grantor may maintain a special power of appointment in an irrevocable trust giving him or her the freedom to modify the beneficiaries without changing the benefits.
- Property ownership and asset protection
Assets placed in an irrevocable trust no longer belong to the Grantor. The trust has its own identity. The Grantor may still use assets for his or her benefit as specified in the trust, but he or she does not own the assets (much like leasing). Creditors cannot claim assets from the Grantor in this case, as the Grantor does not own the assets.
In a revocable trust, the Grantor retains complete ownership of the property.
- Estate taxes
As seen above, in an irrevocable trust, the Grantor no longer owns the property. Thus, it is not included in the value of property at the time of death. A revocable trust does not change ownership, and thus the value of the property would be included at the time of death. However, keep in mind the unlimited marital exclusion. Surviving spouses may effectively pass their estate, tax free, to their spouse. In addition, the 2016 estate tax exclusion is $5.34 million.
With an irrevocable trust, the Trustee should be an independent person chosen by the Grantor. The Trustee should not be a family member, as this could create conflict. However, with a revocable trust, the Grantor most often serves as the Trustee, maintaining control over the assets in the trust.
- Income tax effects
With an irrevocable trust, the trust is its own entity and typically has its own tax identification number and is responsible to file a 1041. For a revocable trust, the Grantor still owns the assets and files everything on their 1040.
As seen above, the main purpose of an irrevocable trust is to protect assets. The main purpose of a revocable trust is to avoid probate, simplifying the transfer of assets. Determining the reason for the trust will allow the Grantor to make an informed decision about what type of trust is best for his or her situation.
And as with all legal and financial planning, laws change, so a consultation with an attorney is advised before creating a trust or any estate plan. For more information, or to speak with an expert, contact Baron Law LLC at 216-573-3723 or email Dan@baronlawcleveland.com.