Revocable vs irrevocable trust: which is better. The difference between revocable and irrevocable trusts and the purpose each serves in estate planning.
Q: I am divorced and have two grown daughters. I am placing my house in a trust. My attorney is recommending an irrevocable trust. Which do you prefer, revocable or irrevocable and why?
Revocable vs Irrevocable Trust: Which is Better
A: What we prefer has nothing to do with whether you should have a revocable or irrevocable trust. Those two trusts are totally different and serve totally different purposes.
A revocable trust allows you to put your home into a trust and you remain the owner of the trust and control the trust entirely. When you put a property into a revocable trust, there is no difference in how the IRS views your ownership of the property or how most governmental agencies view the property. Furthermore, you can always take the property out of the trust and do just about whatever you want with the property.
On the other hand, an irrevocable trust takes the property out of your estate and somewhat out of your control. With an irrevocable trust, you no longer own the property. The trust owns the property and the trust controls the destiny of the property. You, as the former owner, would have no ability to take the property out of the trust, sell it, or do as you wish with the property. The beneficiaries of the trust are the ones that control the future of the trust.
Having said all that, there are quite a number of irrevocable trusts and each of those trusts have a different purpose. We won’t go into the differences between those trusts and you’d need to talk to your attorney to figure out why your attorney feels that an irrevocable trust is right for you.
Using Trusts in Estate Planning to Avoid Taxes or Avoid Probate
However, when it comes to higher net worth individuals, placing a personal residence into a certain type of irrevocable trust can work well for estate planning purposes. Let’s say you have a home worth $3 million and you have other assets worth $10 million. If you were to die today, under current federal tax law your estate would owe some federal estate taxes and, depending on what state you live in, you may also owe state estate taxes. However, if your home was in a type of trust that conveyed the home to your kids and was set up properly, the home would not be considered part of your estate and the value of the property would not get taxed as part of your estate.
As we mentioned, most irrevocable trusts are set up for estate and federal estate tax purposes while revocable trusts (also known as living trusts) are set up to avoid probate issues but have no effect on your estate income or federal income taxes.
We’d like to see you sit down with your attorney and have them tell you why they suggest an irrevocable trust. Once the attorney explains their reasoning, you can make up your mind as to what will be best for you and your children.