Irrevocable Trust or Revocable Trust: What is the Difference?
Estate and long-term care planning can be tedious and confusing, but remains necessary. Now more than ever, as the world has battled the COVID-19 pandemic and nearly everyone knows someone who has fallen ill, it is important to consider your estate planning and long-term care needs. Drafting and regularly updating your will, living will, and durable power of attorney is a great first step. But, you may also want to consider forming an irrevocable trust or revocable trust. Differentiating between trusts can be confusing, and it is important you seek the advice of a trusted probate, estate planning, and elder law attorneys when crafting a trust. Our attorneys at Darpel Elder Law focus on their clients' elder law and estate planning needs and can assist you in crafting a trust that meets your unique situation.
What is a Revocable Trust?
A revocable trust can be modified at any time. The grantor retains ownership and control over the assets and investments and can add funds to the trust as they see fit. A revocable trust provides flexibility to the grantor if they are concerned about financial stability or lack of access to liquidity in an emergency or medical crisis. Unlike an irrevocable trust, funds held in a revocable trust cannot be distributed to beneficiaries until the death of the grantor. Income or interest gained on trust investments are paid directly to the grantor until their passing. Both irrevocable and revocable trusts circumvent probate and inheritance tax, depending on the grantor. In Kentucky, inheritance tax ranges from 4 to 16% depending upon Class A or Class B classification. Class A recipients are members of the decedent's immediate family, parents and siblings. Class B recipients include in-laws, nieces and nephews, and great-grandchildren. For small and large estates, inheritance tax can be an unwelcome surprise for beneficiaries that can be avoided through use of a trust.
What is an Irrevocable Trust?
Both irrevocable trusts and revocable trusts can be “living trusts.” This means the trust is formed while the grantor is still living. The trustee makes trust distributions to beneficiaries based on the terms of the irrevocable trust. Irrevocable trusts are often used to provide for minors, disabled loved ones, or to shield assets from creditors. An irrevocable trust cannot be revoked, amended, or terminated. The funds or assets the grantor has transferred or allocated to an irrevocable trust cannot be removed by the grantor. Assets placed in certain irrevocable trusts can be protected from the capital gains tax as well as inheritance taxes. In addition, funds placed in an irrevocable trust cannot be extricated by a nursing home to pay a past due bill, contingent on certain conditions that should be discussed. One important difference between irrevocable and revocable trusts is ownership. After an irrevocable trust is in place, the grantor no longer has control over the assets within the trust but designates a trustee to maintain the funds and assets held within the trust.
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Forming a trust is very dependent upon your unique circumstances and needs. Any trust should be tailored to benefit you and your family's specific needs, particularly if long-term care planning is involved. If you have questions about investment vehicles, irrevocable or revocable trusts, or need to revise your estate planning documents, contact Darpel Elder Law Services. Our attorneys and staff are dedicated to exceeding our clients expectations and can assist you with all of your long-term planning needs. Call today to schedule a consultation.