Clients often ask me, “What is the difference between a Revocable and an Irrevocable Trust and which option is best for me?”
The short answer is that the creator of a Revocable Trust can revoke or change the terms of the trust, whereas the creator of an Irrevocable trust cannot. For many families a Revocable Trust makes a lot of sense as it is more flexible. The creator of the trust retains control and the trust assets will avoid probate. It is a private document and you can create comprehensive distribution patterns. Revocable trusts become irrevocable when you die. This makes sense in that when you set that trust up during your lifetime, you are in control, but upon your death we want to make sure that the new trustees and beneficiaries cannot change your wishes.
However, for some clients an Irrevocable Trust may be a better option. Here are a few reasons to consider an Irrevocable Trust:
- Irrevocable Trusts can be a great estate tax planning tool. Currently the federal estate tax exclusion is $11.7 million and the Maryland estate tax exclusion is $5 million. For most people we do not need to explore advanced estate tax planning tools, but some of the more common trusts used for this purpose are:
- ILIT – Irrevocable Life Insurance Trusts are an effective tool to remove life insurance proceeds out of the estate for estate tax purposes
- QPRT – Qualified Personal Residence Trusts can be used to remove the value of the primary residence out of the estate for estate tax purposes
- Charitable Remainder Trusts – these can reduce income taxes as well as estate taxes, all the while benefitting a charity
- Irrevocable Medicaid Trusts are an extremely valuable tool to exclude certain assets from the resource calculations of the Medicaid system when applying for Medicaid nursing home benefits.
- Irrevocable Special Needs Trusts are also valuable tools when we are planning for a beneficiary with a disability.
As you can see there are a variety of different tools we can use in estate planning and it is important to consult with an estate planning attorney to determine the best tool for your specific needs and goals.