Estate planning is one of the most important steps you can take to ensure that your wishes are carried out after your passing. A living trust, also known as an inter vivos trust, is a key tool in controlling how your assets are distributed. But when it comes to setting up a living trust, one important decision is whether to choose a revocable living trust or an irrevocable living trust.
What is a Living Trust?
A living trust is a legal document you create while you're still alive to manage and distribute your assets. It allows you, the trust creator (or grantor), to transfer assets into the trust, while maintaining control during your lifetime. When you pass away or become incapacitated, a successor trustee steps in to carry out your instructions.
In Florida, the two main types of living trusts are:
Revocable Living Trust
Irrevocable Living Trust
Each has its own set of benefits and limitations, and understanding these differences is essential to choosing the right one for you.
1. Revocable Living Trust: Flexibility and Control
A revocable living trust is the most flexible option. As the name suggests, it can be amended, changed, or even revoked entirely at any time while you’re alive. You maintain full control over the trust’s assets and can adjust its terms as your circumstances change.
Benefits of a Revocable Living Trust
Avoids Probate: One of the biggest advantages is that assets in a revocable trust bypass the probate process, speeding up distribution to your beneficiaries and keeping matters private.
Full Control: You can change the trust as needed, whether it’s adjusting beneficiaries or altering how assets are distributed.
Protection in Case of Incapacity: If you become incapacitated, the successor trustee can step in and manage your assets without a court-appointed guardian.
Easy to Modify: Life changes, such as marriage, children, or a change in your financial situation, can be reflected with simple amendments to the trust.
Drawbacks of a Revocable Living Trust
No Protection from Creditors: Since you maintain control over the trust, it doesn't shield your assets from creditors or lawsuits.
No Tax Advantages: A revocable trust does not offer tax reductions or estate tax benefits, unlike some other estate planning strategies.
Higher Initial Costs: Setting up a revocable trust can be more expensive than a simple will due to legal fees and document preparation.
Medicaid Impact: Assets in a revocable trust may still be counted toward your estate when applying for Medicaid if you need long-term care.
Requires Ongoing Management: A revocable trust needs to be funded properly and kept up-to-date, which can involve ongoing paperwork.
2. Irrevocable Living Trust: Protection and Tax Benefits
An irrevocable living trust is a more permanent option. Once established, it cannot be changed or revoked without the consent of the beneficiaries or a court order. This type of trust offers significant benefits in terms of asset protection, tax savings, and eligibility for government programs.
Types of Irrevocable Trusts
AB Trust: Commonly used by married couples, the AB Trust allows the first spouse’s assets to be split into two parts, helping reduce estate taxes.
Life Insurance Trust: This type of trust holds life insurance policies outside your taxable estate, which can help reduce estate taxes.
Charitable Trust: A charitable trust allows you to leave part of your estate to charity while still benefiting your heirs, either by distributing assets to your heirs first or to the charity.
Benefits of an Irrevocable Living Trust
Asset Protection: Once assets are placed in an irrevocable trust, they are no longer considered your property, protecting them from creditors, lawsuits, and other claims.
Estate Tax Reduction: By removing assets from your estate, an irrevocable trust reduces estate taxes and can preserve wealth for your heirs.
Eligibility for Medicaid: If you’re planning for long-term care, an irrevocable trust can help lower your estate value and meet Medicaid eligibility requirements.
Drawbacks of an Irrevocable Living Trust
Loss of Control: Once you transfer assets to an irrevocable trust, you no longer own them, and you lose the ability to change the trust’s terms.
Difficult to Amend: Modifying an irrevocable trust is not easy and often requires approval from all beneficiaries or legal intervention.
Tax Considerations: Transferring assets to an irrevocable trust may trigger gift taxes, and the trust may require separate tax filings.
Access to Assets: Since the assets no longer belong to you, they are not easily accessible for personal use, which can be a disadvantage if your circumstances change.
No Step-Up in Basis: The assets in an irrevocable trust may not receive a step-up in basis when you pass, which could lead to higher capital gains taxes for your heirs.
Choosing Between a Revocable and Irrevocable Trust
When deciding between a revocable living trust and an irrevocable living trust, your choice will depend on your priorities:
If you want flexibility, the ability to make changes, and want to avoid probate without giving up ownership of your assets, a revocable trust is the best option.
If you’re looking for asset protection, want to reduce estate taxes, or need help with Medicaid planning, an irrevocable trust might be the better choice, but it comes with the trade-off of losing control over the assets you place in the trust.
Consult with Estate Planning Attorneys in Palm Beach County
At Doane & Doane, PA, we specialize in helping clients navigate the complex world of estate planning, including choosing between a revocable living trust and an irrevocable living trust. Our experienced attorneys will work closely with you to create a custom plan that aligns with your goals and ensures your wishes are carried out.
With over 20 years of experience serving clients along Florida’s Gold Coast and Treasure Coast, we combine the resources of a large firm with the personal attention you expect from a boutique practice.
