January 15th, 2020
Trusts can be useful tools to protect your assets, save on
estate taxes, or set aside money for a family member. But before you commit to
adding a trust to your estate plan, make sure you understand the differences
between revocable (also called “living”) and irrevocable trusts because each
offers advantages and disadvantages, depending on their purpose.
While the two main types of trusts differ in how they are
structured and taxed, both types of trusts are tools for setting aside assets
and distributing them according to specific wishes and instructions. They can
protect one’s property, safeguard a family’s financial future, and provide
tax-saving strategies.
Structure
As the name suggests, an irrevocable trust, once established, can’t be canceled or revoked. The person creating the trust, sometimes called the “grantor,” transfers assets into the trust and permanently gives up all claim to them. A trustee is appointed to carry out the instructions spelled out in the trust. No changes to the terms of the trust can be made without the consent of the trust’s beneficiaries.
As the name suggests, an irrevocable trust, once established, can’t be canceled or revoked. The person creating the trust, sometimes called the “grantor,” transfers assets into the trust and permanently gives up all claim to them. A trustee is appointed to carry out the instructions spelled out in the trust. No changes to the terms of the trust can be made without the consent of the trust’s beneficiaries.
In contrast, a living trust offers more flexibility. The grantor of a
living trust still owns and controls the assets and can make changes at any
time. A living trust also has a trustee, someone who would take over management
of the trust if the owner is no longer capable of doing so.
Taxes
Both types of trusts offer tax advantages, although these differ in key ways. An irrevocable trust is considered a separate entity and must have its own tax returns filed annually under its tax ID number. Irrevocable trusts can incur additional costs if a CPA is needed for tax preparation. Because it is a trust and not an individual, the irrevocable trust can’t qualify for the various deductions and exemptions that individuals can claim on their returns. Also, higher rates apply at lower income levels. For example, an irrevocable trust is subject to the highest federal tax rate of 37 percent if its income exceeds $12,500, a much lower ceiling than for individuals.
Both types of trusts offer tax advantages, although these differ in key ways. An irrevocable trust is considered a separate entity and must have its own tax returns filed annually under its tax ID number. Irrevocable trusts can incur additional costs if a CPA is needed for tax preparation. Because it is a trust and not an individual, the irrevocable trust can’t qualify for the various deductions and exemptions that individuals can claim on their returns. Also, higher rates apply at lower income levels. For example, an irrevocable trust is subject to the highest federal tax rate of 37 percent if its income exceeds $12,500, a much lower ceiling than for individuals.
Assets within a living trust are still considered the property
of the trust owner. Any income earned from this trust is filed along with the
owner’s other income. Also, the assets of the trust belong to the owner’s
estate and are taxed accordingly on the owner’s death. For this reason, wealthy
families may choose to transfer a portion of their assets into an irrevocable
trust to keep the value of their estate below federal and state exemptions.
Protecting Assets in the Future
One key advantage of irrevocable trusts is that their assets are protected from lawsuits and creditors. A living trust offers no such protection, because the trust assets are still part of the owner’s property.
One key advantage of irrevocable trusts is that their assets are protected from lawsuits and creditors. A living trust offers no such protection, because the trust assets are still part of the owner’s property.
A living trust is an option for someone who doesn’t need all the
layers of protection but still wants to set up some provisions for the future.
A living trust works well to set aside assets in the event that the
grantor becomes unable to manage his or her finances in the future, due to
illness or old age. With a living trust, the grantor controls the property
while he or she is competent, but a trustee can take over this function if the
grantor loses this capacity.
If there are other considerations, such as estate tax planning,
protection from creditors, or providing for a special needs family member, an
irrevocable trust might be the better way to go. Your planner will have the
best answers for your particular circumstances.
Keep in mind that this is general advice only and that specific
situations may be treated differently than those described in this article. It
is prudent to have an attorney’s advice on how your specific situation will be
handled using different types of trusts. To find an attorney near you, go
here: https://www.elderlawanswers.com/elder-law-attorneys.
https://www.elderlawanswers.com/understanding-the-differences-between-a-living-trust-and-an-irrevocable-trust-17536?
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