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Advantages and Disadvantages of Using a Revocable or Irrevocable Trust

Advantages and Disadvantages of Using a Revocable or Irrevocable Trust

July 28, 2023

Trusts can be a valuable tool for both elder care and estate planning, helping to manage assets during your lifetime and control how those assets are distributed after death.  There are two primary types of trusts, revocable and irrevocable, each with its own set of advantages and disadvantages.  You will need to consider these points before deciding which will work best for you.


Revocable Trusts:

Advantages:

  1. Control: The creator, also known as the grantor, retains control over the assets in the trust and can modify or terminate the trust at any time.

  2. Probate Avoidance: Assets held in a revocable trust bypass the probate process, allowing for quicker distribution to beneficiaries upon the grantor's death.

  3. Privacy: Unlike wills, which become public record when they go through probate, trusts can keep an estate’s details private.

  4. Planning for Incapacity: Should the grantor become unable to manage their own affairs, a successor trustee can step in to manage the assets within the trust.


Disadvantages:

  1. Cost and Complexity: Setting up and maintaining a revocable trust can be complex and expensive, requiring legal assistance.

  2. No Tax Benefits: Because the grantor retains control over the assets, they're still considered part of the taxable estate, so a revocable trust offers no tax advantages.

  3. Creditors: Assets within a revocable trust are still accessible to the grantor's creditors because the grantor retains control over them.


Irrevocable Trusts:

Advantages:

  1. Tax Benefits: Because the grantor relinquishes control over the assets in an irrevocable trust, those assets are no longer part of the grantor's taxable estate, which can reduce estate taxes.

  2. Asset Protection: Once assets are placed into an irrevocable trust, they generally are safe from creditors, as the grantor no longer technically owns them.

  3. Medicaid Planning: Assets in an irrevocable trust aren't typically counted for Medicaid eligibility purposes, making them an effective planning tool. However, it's important to note that there's a five-year "look-back" period for asset transfers.


Disadvantages:

  1. Loss of Control: Once an asset is in an irrevocable trust, the grantor typically can't change the terms of the trust, reclaim the asset, or alter beneficiaries.

  2. Complexity and Cost: Like revocable trusts, irrevocable trusts can be complex and expensive to set up and administer.

  3. Potential Tax Consequences for Beneficiaries: While the estate may receive tax benefits, beneficiaries could face income tax consequences upon the distribution of the assets.


Asset protection and estate planning is an important topic that you need to include as part of your overall financial planning process.  If you or someone you know has concerns about protecting their assets against creditors, including Medicaid liens, it is important to understand the benefits of a trust, and to be sure to set up the right type of trust.  If you have a large estate, then setting up the appropriate trust can go a long way in minimizing your estate tax and also minimizing or eliminating probate altogether.


If you have questions on this topic, please feel free to call or email me.  Implementing the proper asset protection and estate planning strategies is essential not only to protect you, but also to ensure that one day you leave a legacy to your children or other beneficiaries.


John J. Vento, CPA, MBA, CFP®

President & CEO

Financial Advisor