When planning your estate, choosing the right trust is crucial. Revocable living trusts (RLTs) and irrevocable trusts serve different purposes and offer distinct advantages and limitations. This blog explores the differences between these two types of trusts, helping you make an informed decision for your estate planning needs.
Revocable Living Trusts: Flexibility and Control
A revocable living trust is a popular estate planning tool due to its flexibility. As the grantor, you retain full control over the assets in the trust. You can alter, amend, or revoke the trust at any time during your lifetime. This control is a significant advantage for many people.
When you create the trust, you name a successor to assume the role after your passing. This individual or entity could also be empowered to act as the administrator in the event of your incapacity.
Probate Avoidance With Revocable Living Trusts
One of the primary benefits of a revocable living trust is probate avoidance. Assets in a revocable trust bypass the probate process, allowing for a smoother, quicker transfer to beneficiaries after your death. This not only saves time but also maintains privacy, as probate proceedings are matters of public record.
Downsides of Revocable Living Trusts
However, revocable living trusts have some limitations. Since you retain ownership of the trust’s assets, they are still considered part of your estate. This means they are subject to estate taxes and can be reached by creditors. Additionally, if you apply for Medicaid, the assets in a revocable trust count against you, potentially impacting your eligibility for long-term care coverage.
Irrevocable Trusts: Protection and Estate Reduction
An irrevocable trust, on the other hand, involves surrendering control over the assets. Once you place assets into an irrevocable trust, you cannot easily change or revoke the trust. This loss of control is a significant factor but comes with notable advantages.
Assets in an irrevocable trust are no longer considered part of your personal estate. Since the assets are not in your name, they are generally protected from future creditors and lawsuits.
Additionally, removing assets from your estate can significantly reduce your estate tax liability if you are exposed. Most people do not have to be concerned about estate taxes because there is a credit or exclusion that is quite high relatively speaking.
The exclusion is an amount that can be transferred before the estate tax would be applicable on the remainder. This tax carries a 40 percent maximum rate, so it can definitely take a big bite out of your legacy if you have been very successful from a financial standpoint.
In 2023, the estate tax exclusion has been $12.92 million. In 2024, the exclusion is going up to $13.61 million, so there will be a bit more flexibility.
No one would have to worry about the estate tax if you could just give away your assets to your loved ones while you are living to avoid it. This is not possible, because there is a gift tax in place that is unified with the estate tax.
The large exclusion is a unified exclusion. It applies to lifetime gifts along with the estate will be transferred after your passing.
Pending Exclusion Reduction
While we are on the subject, we should pass along some important information about the exclusion. This is the highest it has ever been, and it is in place because of a provision in the Tax Cuts and Jobs of 2017.
This provision is going to expire or sunset at the end of 2025. When that day comes along, the exclusion will plummet to the $5.49 million level that was in place in 2017. Therefore, you have a limited window of opportunity to use the record-high exclusion to fund irrevocable tax efficiency trusts.
Medicaid Planning With Irrevocable Trusts
Irrevocable trusts are often used in Medicaid planning. Because the assets in an irrevocable trust are not counted as your personal assets, they do not affect your Medicaid eligibility.
This makes irrevocable trusts a strategic tool for those considering future long-term care needs and seeking to qualify for Medicaid since Medicare doesn’t cover it.
Considerations When Choosing Between Trust Types
The choice between a revocable and an irrevocable trust depends on your personal circumstances and estate planning goals. If maintaining control and flexibility is important to you, a revocable living trust may be the better choice.
However, if asset protection, estate tax reduction, and Medicaid planning are your priorities, an irrevocable trust may be more suitable.
Revocable Trusts for Control, Irrevocable Trusts for Protection
In summary, revocable living trusts offer control and flexibility, allowing you to avoid probate while keeping your assets within reach. They are ideal for those who want to manage their assets actively during their lifetime.
In contrast, irrevocable trusts provide asset protection, estate tax benefits, and aid in Medicaid planning but require you to relinquish control over your assets.
Conclusion: Making the Right Choice for Your Estate
Understanding the differences between revocable living trusts and irrevocable trusts is essential in making the right choice for your estate planning needs. Both types of trusts have their unique advantages and limitations.
Consider your long-term goals, the need for asset protection, and your willingness to relinquish control when deciding which trust fits your estate planning strategy.
Attend a Free Webinar!
Attorney Hunter Montgomery conducts webinars on an ongoing basis that will open your eyes to some very important aspects of the estate planning process. Attendees consistently provide positive feedback, and to top it off, there is no charge to attend our webinars. You will learn a lot if you sit in, so this is a great opportunity to make a connection with our firm.
To see the dates and learn more about the sessions, visit this page: Hilton Head, SC estate planning webinars.
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