Irrevocable vs. Revocable Trusts

Irrevocable vs. Revocable Trusts

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Estate planning often involves setting up revocable or irrevocable trusts. Each one of those trusts begins with an intervivos trust — a trust you set up that goes into effect while you're still alive. You then decide if the intervivos trust is revocable, meaning that you can change your mind, or irrevocablemeaning sorry, what's done is done.

Irrevocable trusts are the easier of the two to understand. After you place property into an irrevocable trust, you can't retrieve the property. For all intents and purposes, that property now belongs to the trust, not to you!

With a revocable trust, however, you can place property into the trust and at some point in the future, undo the transfer by removing the property and terminating the trust.

Very often, if you die or become incompetent, the provisions of a revocable trust call for the trust to become an irrevocable trust. For example, you can terminate a revocable burial trust at any time, usually before death or incompetency. But if the burial trust still exists when you die or become incompetent, the trust becomes irrevocable and the money is used for your burial expenses.

You most likely have gift tax consequences when you establish an intervivos irrevocable trust, so make sure your accountant is "in the loop," along with your attorney. Also, certain transfers within certain time periods prior to your death can be included in your estate as "gifts in contemplation of death" under both state and federal statutes. So watch out for possible death tax implications!

How revocable and irrevocable trusts affect estate taxes

The most significant distinctions between revocable and irrevocable trusts are the estate tax considerations. Property that you place in an irrevocable trust is no longer considered part of your estate, meaning that the property typically isn't included in your estate's value when it comes to determining if you owe death taxes and, if so, how much.

However, you still own property that you place into a revocable trust, and therefore that property is still subject to death taxes. If you can change your mind about the trust and retrieve the property from the trust at any time while you're still alive, the property is really yours and should be considered part of your estate.

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