A commonly used tool in the estate planning process is the creation of trusts. While widely associated with vast and sprawling estates, attorneys often use trusts to help manage and protect estates of all sizes. There are two common categories of trust: revocable and irrevocable trusts, each with its own benefits and drawbacks. So, to help you figure out which type of trust would be most beneficial for you, here is a quick guide to revocable and irrevocable trusts.
What is a Revocable Trust?
The first type of trust is a revocable trust, commonly referred to as a living trust. This type creates a separate legal entity allowing the trust’s creator to retitle any assets he or she owns in the name of the trust. A trustee then manages these assets on behalf of any beneficiaries listed in the legal document.
What are the Pros and Cons of Revocable Trusts?
Establishing a revocable trust can be advantageous for several reasons. One of the most drawing factors of starting a revocable trust is that it allows an estate to avoid the probate process. When a person’s assets are protected in a trust, the trust’s beneficiaries automatically receive their assets following a person’s death, thus simplifying the transfer of property. Another advantage of creating a revocable trust is that it is very easy to create, amend, and destroy, if necessary, thus giving the creator much control.
However, since the assets are still considered to be owned by the trust’s grantor, and because the trust can be altered at any time, there are no tax benefits when creating a revocable trust. And although the trust can bypass the probate process, creditors of the grantor can file any claims against the revocable trust.
Additionally, both revocable and irrevocable trusts pass outside probate in South Carolina. This not only allows anonymity, but it also allows assets to pass without paying probate fees or taxes.
What is an Irrevocable Trust?
The second type of trust is an irrevocable trust. Much like its name suggests, the type is when a grantor gives up all ownership of their assets being placed in trust and cannot change or revoke their actions. This type requires a third-party trustee to manage the entire trust. It is important to note that they are many types of irrevocable trusts. These include, but are not limited to the following:
- Special Needs Trust
- Dynasty Trust
- Charitable Trust
- Asset Protection trust
Therefore, you should carefully consider which type of irrevocable trust would best fit your needs and objectives.
What are the Pros and Cons of Irrevocable Trusts?
An irrevocable trust is a powerful estate planning tool that provides many benefits. Similar to revocable trusts, irrevocable trusts also can be used to avoid the probate process entirely, which would be advantageous to any beneficiary. However, one of the most notable benefits is the tax benefits. Since the grantor relinquishes their ownership interest over their assets in favor of the trust, this protects the assets from excessive taxation from federal and state governments. It is also worth noting an irrevocable trust can protect against the claims of any creditors.
Despite the numerous benefits, there are some disadvantages to creating an irrevocable trust. This includes the fact that irrevocable trusts limit individuals’ control over their assets. By placing them in this type of trust, a person gives up all control in favor of it being controlled by the trustee. Another disadvantage is that it is hard to alter an irrevocable trust; any changes typically require court approval.
A trust is only part of the estate planning process. Not everyone needs one, and if you do, there is much more to developing an estate plan – wills, proper titling of deeded property, powers of attorney, health directives, insurance, understanding probate property, and more. Even when you decide you need a trust, there are many varieties. An attorney can advise you of your options.
Should you have any questions about setting up a trust, please give Henderson & Henderson a call at 843-212-3188. You can also visit the firm’s website for more information about the estate planning process: HHLawSC.com.