Revocable vs. Irrevocable Trusts in Arizona
What is the Difference in a Revocable and an Irrevocable Trust in Arizona? Our blog should help you understand that.
Revocable vs Irrevocable Trust - What is the Difference?
In estate planning, our clients often have differing goals and desires and it is important for us to know what tool to use in each situation. Some clients are looking for a simple approach to ensure that their estate can avoid probate court when they pass away. Others are looking to add protections for their beneficiaries and to make sure that the inheritance they leave behind isn’t wasted or otherwise utilized poorly. Others are looking to maximize their tax savings and are worried that they may have to pay up to 40% of their net worth over to the IRS when they pass away. Some are looking for all of the above. Thus, knowing what tool to offer and utilize at what time is of the utmost importance. At Citadel Law Firm, we are often asked about the difference in Revocable vs Irrevocable Trusts. The differences are highlighted below, but it is important to remember that every situation is unique, and if creating a trust is on your to do list, you should schedule a free consultation (click here) with our office where an attorney can go over your unique circumstances and make recommendations to maximize and honor your wishes.
A Revocable Living Trust, or Revocable Trust is the center stone of most estate plans. It is a document that we sign during life which creates an entity that will survive after we pass away. It is basically a contract that if done correctly, will avoid probate and allow for different distribution options to your heirs when you pass away. It is by definition Revocable, meaning that you can change it, amend it, void it, or otherwise restate it whenever you care to during your life while you have capacity to enter legal agreements. This also means that you can move property into and out of the trust whenever you would like. This type of trust provides you with flexible planning that is easily amendable in the future, and can provide you with probate avoidance, beneficiary asset protection, and peace of mind knowing that you have planned.
Who should utilize a Revocable Living Trust?
This type of trust is for anyone looking to plan ahead. There isn’t a hard dollar amount that you must obtain or a certain age that you must reach before you can take advantage of a Revocable Living Trust. This trust is tailored towards probate avoidance and protecting your heirs, while providing you with the maximum amount of flexibility. We might recommend this type of plan for someone that has just had their first child that wants to make sure that their child is protected should something happened to the new parent. Or we might suggest this type of plan for someone that has a disabled beneficiary that they would like to provide for in their plan. Further, if our client simply wishes to avoid probate court at their death and to confirm who their heirs are, this is a fantastic way to do so. A Revocable Living Trust is just as suitable for someone with $100,000.00 as it is for someone with $1,000,000.00. The different distribution options after you pass away make this a fantastic tool to either make sure your assets go where you want them to, or to protect those assets and protect your beneficiaries from divorce, liabilities, lawsuits, and creditors.
How is a Revocable Living Trust Taxed?
This type of trust is taxed at your individual rates, during your life. All property is purchased using your social security number and is titled in your name, as trustee of your Revocable Living Trust. Once you pass away, the trust pays tax on any income it generates and doesn’t distribute based on the IRS Trust Tax Tables for that year.
An Irrevocable Trust is another tool that we can use to ensure that our client’s wishes are being honored. There are actually many different types of Irrevocable Trusts, so we will only touch on this generally. These trusts can either be created during life, or at death via a testamentary document. By definition, this trust is irrevocable, meaning that it cannot be changed but for the limited allowances the law provides, and even then it can only be changed by going in front of a judge. Once you create an Irrevocable Trust, and then place property into that trust, you no longer own that property and, in most instances, you cannot control or benefit from that property. These trusts can be great tools to help those with taxable estates to avoid taxation at their death. We can also utilize these to assist with Medicaid Planning for our clients with a family history of needing long term care. In Arizona, these trusts can also provide asset protection, so long as other criteria is met.
Who should utilize an Irrevocable Trust?
We would generally recommend these types of trusts to our clients that potentially have a taxable estate, meaning that they have more assets than the applicable lifetime gift and estate tax exemption, or to our clients that are planning for Medicaid purposes. Further, these can be beneficial to those that have the need to plan for children who are disabled. Please note that the lifetime gift and estate tax exclusion is a moving target. It is constantly being altered and there are active proposed bills currently to change the exemption. If saving money on taxes at your death is important to you, we recommend calling our office at (480)565-8020 and scheduling an appointment. We instruct our successor trustee to create these trusts at your death, and then fund them with your beneficiary’s inheritance. This is called a Beneficiary Asset Protection Trust, and is an extremely valuable tool.
How is an Irrevocable Trust Taxed?
Because of the varying types of Irrevocable Trusts, this question is going to be unique to the situation of the grantor or settlor. We can create trusts that are immediately taxed at trust’s rates, trusts that are taxed at the beneficiary’s rates, and trusts that are taxed at the grantor or settlor’s rates. Depending on which type of trust suits you, there many options to minimize taxation utilizing these types of trusts.
In conclusion, the main difference between a Revocable vs Irrevocable Trusts is the flexibility that is offered, as well as the tax schemes involved with each. For most individuals and married couples, a Revocable Living Trust is going to be the better option. However, for a select group, an Irrevocable Trust can protect assets and provide tax savings.
Every situation is going to be different, so please click here and schedule a free consultation with one of our trust attorneys to review your circumstances and to see what would best fit your needs. If you prefer call (480)565-8020 to schedule, we will be pleased to help.
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