As you go through your estate planning process, it’s important you fully understand the options and tools available for you to accomplish your goals. For example, knowing the difference between revocable and irrevocable trusts is crucial to your estate planning success.
Here is a brief analysis of each type of trust and how they differ from each other.
Revocable living trusts
Revocable trusts can be changed at any time. If you ever have any second thoughts about provisions of those trusts for any reason, or simply want to change your beneficiary or trustee, you can easily modify the terms of that trust with an amendment, or revoke the entire thing and write it from scratch.
The clear benefit of such a trust is its flexibility. However, the downside is that any assets placed in a revocable trust will still be considered your own assets for estate tax and creditor purposes. If you are sued, those trust assets will not be protected from your creditors, and all assets will be subject to federal and state taxes upon your death.
There are several main reasons people use revocable trusts in their estate planning:
- Planning for incapacity: An eventual mental or physical disability could prevent you from managing your own assets. Any assets you place in a revocable trust can be managed by your disability trustee, rather than a court-appointed guardian.
- Avoid probate: Any assets placed in a revocable trust will bypass the probate process after your death, going directly to the listed beneficiaries.
- Privacy: The contents of your revocable trust do not become public record, unlike the contents of a will.
As the name suggests, an irrevocable trust cannot be revoked after a certain point in time—usually upon your death. You can design it to break into several separate irrevocable trusts for the benefit of your surviving spouse or other beneficiaries, if you wish.
Irrevocable trusts do not, then, have the same flexibility that is characteristic of revocable living trusts. They do have several benefits, however:
- Estate tax reduction: Any assets placed into the trust will not count toward the value of your estate, as they technically become property of the trust rather than you, the trust maker. If your estate is valued over the threshold for the estate tax, this can help you reduce your estate tax responsibility.
- Asset protection: The trust assets in an irrevocable trust are no longer property of the trustmaker, which means creditors or other people taking legal action against you cannot touch those assets.
- Charitable giving: You can set up irrevocable trusts specifically for leaving behind money or assets to charitable organizations. If you begin transferring assets into a charitable trust while you are still alive, you’ll receive charitable income tax deductions for the years in which you make those transfers. If the initial transfer does not occur until after your death, the estate as a whole will benefit from the charitable deduction.
For more information about irrevocable versus revocable trusts and which makes the most sense for you to use in your estate, contact an experienced U.S. Virgin Islands estate planning attorney.
Steven K. Hardy is an attorney in the Corporate, Tax and Estate Planning Practice Group at BoltNagi PC, a full service business law firm serving the U.S. Virgin Islands.