SSS LAW: Huntsville Estate Planning

View Original

What's the Difference Between a Revocable and Irrevocable Trust in Alabama?

Living trusts are a critical component of estate planning. 
Even if you don't have any children or significant family members in your life, you likely still have some valuable assets. It's up to you to decide what will happen to those assets when you pass.

The two types of living trusts you'll encounter in your estate planning are irrevocable and revocable trusts. It's essential to understand the difference between the two. Both have certain advantages and disadvantages that may or may not suit your needs.

In this article, we're going to discuss both types of trusts and how they can benefit you in your estate planning.

Keep reading to learn more.  

What Is a Living Trust in Alabama?

Before we can discern the difference between revocable and irrevocable trusts, it's essential to understand something. Both instruments discussed here are technically types of living trusts.

The "living" part tends to throw people off—especially those new to working with trusts, wills, and the overall estate planning in Huntsville, Alabama.

However, the definition of a living trust is simple: A living trust is a legal document that an individual creates during their lifetime. This document names a specific person, referred to as the trustee, to be given the fiduciary responsibility of managing the assets of the grantor—or settlor—until those assets can be delivered to their designated beneficiary. 

Within every trust, there's a certain date or milestone achievement named. This specific date typically allows the assets to be funneled into an account for the designated beneficiaries. 

Unlike wills, living trusts may go into effect while the grantor is still alive. The purpose behind creating a trust is so that the assets can be transferred to the beneficiary at a certain point in time without having to undergo complex and expensive court and legal processes. Namely, the probate process.

The same may hold true if the settlor passes away before the assigned date arrives to release their assets to the named beneficiary.

The two types of trusts that fall under this category are revocable and irrevocable trusts. While the two types of trusts have the same goal, they differ almost entirely in their stipulations.

Let's define them: 

Defining an Alabama Irrevocable Trust

An irrevocable trust is a living trust that cannot be amended or terminated, no matter what—even if the trustor is still alive. To attempt any changes, the trustor or trustee would need legal permission.

In other words, once the assets are transferred to the trust, the grantor cannot change the stipulations of the trust or take back any assets. 

They relinquish all ownership rights of any assets listed within the trust—and that's that. 

The Benefits of an Irrevocable Trust in Alabama

Handing over your rights to revoke a trust and give up assets is just one trade-off in the name of gaining several other benefits. Arguably the primary reason to create an irrevocable trust as part of a will is to ensure that certain assets are moved out of your estate. Whereas all assets remain a part of your estate with a revocable trust.

Let's talk about some of the benefits you would gain when choosing an irrevocable trust:

Asset Protection

As mentioned, an irrevocable trust moves specific assets out of the grantor's estate. However, in a revocable trust, the settlor still maintains some ownership rights over these assets, which leaves room for them to be subject to lawsuits or to creditors.

When the grantor names the assets and their subsequent beneficiaries, they no longer own these assets. Neither creditors nor lawsuits can legally claim something that doesn't belong to you. This means any assets you wish to keep within the family may be safer from collection action if titled to an irrevocable trust.

When assets are moved into an irrevocable trust, once again, they are no longer yours. However, it's essential to keep in mind that transferring investment assets through an irrevocable trust will likely result in the trustor owing gift taxes. These taxes can range from 18%-40% depending on the size of the gift being given after calculating for exemptions.

Limiting Estate Tax Liabilities

Since the assets in an irrevocable trust are no longer considered part of the grantor's estate, they may legally qualify as exempt from federal estate taxes. 

Charitable Giving 

Suppose assets are added into what is referred to as an irrevocable charitable trust while the trustor is still living. In that case, the settlor may be eligible for a charitable income tax deduction on assets donated.

Suppose the physical transfer of assets to a charitable trust doesn't happen until the trustor has passed away. In that case, their estate may be entitled to receive what is called a charitable estate tax deduction.

Long-term Care and Nursing Homes

When there's a trust in place, the money intended to be left as part of an estate can be used to front the bill for both short-term or long-term nursing care, should the grantor need it? In addition, irrevocable trusts can keep assets safe for such use.

Defining a Revocable Trust in Alabama

You can think of a revocable trust as different from an irrevocable trust. With revocable trusts, the assets and stipulations can easily be changed or terminated altogether by the grantor. 

Throughout the life of a revocable trust, any income earned by the specified assets listed may still be attributed to the settlor. Additionally, the assets within the trust may not transfer until the grantor has passed away. Accordingly, the settlor retains their rights to the specified assets until death.  

The Benefits of a Revocable Trust

Arguably, the most significant benefit that comes with having a revocable trust is that the trustor can revoke it at any time while they are still alive. 

Many trustors choose to create revocable trusts for the primary purpose of avoiding probate. But irrevocable trusts allow trustors to avoid probate as well. So, what are the real benefits of having a revocable trust?

Specifically, revocable trusts work well for individuals who aren't facing any severe tax obstacles and want to continue maintaining control of their own assets. However, this isn't the only reason or benefit to having a revocable trust. 

Revocable trusts also come in handy for those planning for the future and the possibility of becoming mentally incapacitated. For example, suppose the grantor of a revocable trust becomes mentally incapable of managing their affairs. In that case, their named trustee may become responsible for managing the assets during the settlor's incapacity. Specific guidelines and requests can be written into the revocable trust for the trustee to follow.

Which Is Right for You?

While irrevocable trusts make more sense for some individuals, revocable trusts are better for other situations. That said, revocable trusts don't offer the same benefits as irrevocable trusts—namely, potential asset protection. 

So, which type of living trust is right for you?

Contact us to consult with an experienced Huntsville, Alabama attorney like Sarah S. Shepard today to better understand your options and which type of trust will suit your estate planning needs best.