As you think about the future and the well-being of your beneficiaries, creating an estate plan is an essential part of protecting your assets and your loved ones. A strong estate plan has many important components, including the creation of a trust or multiple trusts. One type of trust that you may consider as part of your estate plan is a revocable trust.
At the Baddour Law Firm, our experienced estate planning attorneys in southern Maryland can guide you through your options and help to create a plan that protects your wishes and prioritize the needs of your family for generations to come. Reach out to us today to learn more.
What Is a Trust?
A trust is a type of arrangement between a grantor (the person who creates a trust) and a third-party trustee in which the grantor allows the trustee to hold and manage assets on behalf of the trust’s beneficiaries. Trusts are often used to pass assets from one generation to the next and have multiple benefits, including tax benefits in some cases and avoiding the probate process. Trusts are used to control wealth, protect legacies, secure privacy, and provide for beneficiaries. Because there are many types of trusts, knowing the differences and which type of trust is most relevant and appropriate for your situation is crucial.
What Is a Revocable Trust?
Also known as a living trust, a revocable trust is a trust where the trust can be altered or revoked per the wishes of the grantor—the originator of the trust. Another important feature of a revocable trust is that the assets held in the trust are not passed to the beneficiaries until after the death of the grantor.
In contrast, an irrevocable trust is a trust that cannot be changed once it is created. When an irrevocable trust is created and assets are placed within it, the terms of that trust are solidified at the time of creation and are virtually immutable.
Advantages and Disadvantages of Revocable Trusts
If you’re considering setting up a revocable trust, it’s important to understand the benefits and downsides of this type of trust. Some of the advantages of a revocable trust include:
- Changes at any time. Perhaps the biggest benefit of a revocable trust—and one of the primary reasons that many grantors are much more comfortable with them when compared to other trust types—is that the provisions of the trust can be changed at any time.
- Transfer to irrevocable at the time of death. While a revocable trust can be changed at any time throughout the grantor’s life, at the time of the grantor’s death, the truth is transferred to an irrevocable trust, which means that once the grantor dies, the terms will be fixed, and the trust cannot be altered anymore. Additionally, assets held in a revocable trust will bypass the probate process, protecting the privacy of the estate and often simplifying the process for the administrator of the estate and the trustee.
While there are certainly advantages to revocable trusts, there are also some downsides to consider as well. Disadvantages of revocable living trusts include:
- Limited asset protection. One of the primary advantages of having a trust is that assets that are held in an irrevocable trust are generally protected from creditors. However, this is not always the case with revocable trusts.
- Limited tax benefits. With an irrevocable trust, assets are removed from the grantor’s ownership and placed in the trust, which means that estate taxes are usually mitigated. However, with a revocable trust, assets are still in control of the grantor, so tax benefits are limited.
Which Type of Trust Is Most Appropriate for My Situation?
If you’re unsure which type of trust is most appropriate for your situation, it’s strongly recommended that you consult with a professional. A revocable trust may be recommended if you know that you will want to make changes in the future or/and your estate’s value is below the federal estate tax exemption requirements. On the other hand, if you don’t think you’ll want to make changes in the future and the value of your estate is at or above the federal tax exemption requirements, you may want to think about an irrevocable trust.
At the Baddour Law Firm, our experienced Maryland estate planning lawyers can provide the guidance and support you need. To learn more about how to get started with our law firm and the estate planning services we provide, please reach out to us in person, online, or by phone at (301) 494-2108. We are here to serve you.