There are numerous types of trusts but often people confuse and conflate irrevocable trusts with revocable trusts, or otherwise call a trust irrevocable when it is merely revocable. The terms, as they suggest, are not synonymous and the type of trust they describe are significantly different.
What is an Irrevocable Trust?
An irrevocable usually cannot be terminated, revoked or changed unless certain limited conditions occur which the law allows. With this kind of trust the grantor, or the person who originally placed the items or money in the trust, may have removed or surrendered his or her rights of ownership to or control over the assets as well as the trust. Sometimes irrevocable trusts are established for tax considerations or as part of tax planning. Depending on the circumstances benefits may flow as a result for removing all incidents of ownership from the grantor. If the assets are placed in the trust, depending on circumstances, it may be possible that the grantor limits or avoids tax liability for the income that the assets generate. If the grantor is a beneficiary of the trust then income tax liability may be difficult to avoid. These rules may vary depending on local laws. Some of the items that can be placed in appropriate circumstances in an irrevocable trust include life insurance policies, businesses, investments, and even cash. In large estates, some life insurance policies are even purchased in some instances to help defray large tax liabilities upon death.
What is a Revocable Trust?
A revocable trust is different from an irrevocable trust in one major way: it allows the grantor of the trust to revoke, cancel or modify it whenever they like. No permission is needed from the beneficiary, who often is the grantor, to make these changes. Any income that is earned from the assets in the trust if payable to the grantor, usually belongs to the grantor during their life and is taxable too. However, once the grantor dies, several things can happen to the assets of a revocable trust depending on the circumstances. There may be immediate distribution of assets to the beneficiaries existing after the grantor’s death or the assets may continue to be held in trust until future dates or events occur. Because of this, this group of future beneficiaries usually do not have any rights to the assets in the trust until the grantor passes. This type of trust can provide financial benefits to the grantor during their lifetime as well as flexibility in case they want to change anything that has to do with the trust. Depending on the circumstances, it is possible after a grantor’s death for an irrevocable trust to come into existence over some assets previously held in the revocable trust. This assumes certain estate planning has occurred to provide for such a trust following death.
If you have questions about these kinds of matters, you may contact Ilam Smith for more information.