Revocable Trust or Irrevocable Trust?

Revocable Trust or Irrevocable Trust?

Choosing Between a Revocable Trust and an Irrevocable Trust

Planning for your loved ones after your death is a loving, compassionate act. For this reason, most people choose to create a will, also known as a last will and testament. However, what many people don’t know is that if you die with only a will in place, your loved ones will be subjected to the probate process. Probate is a court process whereby the courts in Oregon oversee the distribution of your assets. Unfortunately, it can be a long, stressful, and costly process for your loved ones. You can prevent your family from being subjected to the probate process by choosing to set up a trust. There are two main types of trusts: a revocable trust and an irrevocable trust.

Revocable Trust: An Overview

A revocable trust is also called a living trust. It is a commonly used tool in estate planning. A revocable trust is a legal entity that clarifies how your assets should be distributed upon your death. With the help of a trust attorney, you will transfer assets into the trust. Assets commonly placed in a living trust include real estate, bank accounts, investment accounts (aside from IRAs and 401(k)s), and valuable personal items such as jewelry, furniture, etc.

While you are alive, you may designate yourself and/or your spouse as the trustee(s). If you are the sole trustee, your designated successor trustee will be responsible for managing the distribution of your assets upon your death. If you are married, your spouse will become the trustee upon your death.

Benefits of a Living Trust

There are many benefits to creating a living trust. One of the greatest advantages to creating a living trust is that you remain in complete control of it until you die. You can modify it at any point. You can also revoke the trust anytime. Upon your death, the trust becomes irrevocable, meaning that no changes or modifications may be made to it.

Another primary reason people set up a trust is to spare their loved ones from dealing with the probate process. The probate process can delay and reduce your beneficiaries’ inheritance due to costs associated with probate. A second benefit is privacy. If you pass away with a will only, the will is recorded in public records. If you pass away with a revocable trust in place, the inheritance your loved ones receive will remain private.

Finally, trusts may alleviate tax burdens for your beneficiaries. You will need to consult with your CPA to confirm, but in many cases, your beneficiaries may avoid some common taxes associated with an inheritance.

Living trusts aren’t without risks. You should know that if you set up a living trust and you are sued, the assets in that trust are not shielded from liability. Instead, the assets in the trust may be subject to liquidation to fulfill debts.

Irrevocable Trust: An Overview

As its name implies, an irrevocable trust is a permanent decision. If you set up this type of trust, you need to know that it can be incredibly challenging and expensive to modify. Therefore, this type of trust should only be created after a great deal of thought and counsel.

The leading reason that people choose to set up irrevocable trusts is to avoid certain taxes. With an irrevocable trust, the assets in it are protected from estate taxes after your death. Moreover, the beneficiaries will not be held responsible for taxes on income generated by the assets in the trust.

Irrevocable trusts are not nearly as common as revocable trusts. Because they become permanent immediately, they offer almost no flexibility. However, for high-earning individuals who are at an elevated risk for lawsuits, these trusts may make sense. Examples may include attorneys, real estate developers, and medical professionals. The assets in an irrevocable trust are exempt from liquidation or collection if you are sued.

Talk with a Financial Advisor about Setting Up a Trust in Oregon

If you’re thinking about setting up a trust, consult with your financial advisor, your accountant, and a trust attorney about the benefits and any potential risks and downsides. At Finley Davis, our financial advisors work hand in hand with your other advisors to ensure that your estate plan meets your needs and goals. To schedule an appointment with Finley Davis, contact us today by calling 541-342-2224.