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Discussion Question - Contrast revocable and irrevocable trusts. What are the advantages of each. Give examples...

Discussion Question -

Contrast revocable and irrevocable trusts. What are the advantages of each. Give examples of how each would be used.

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Expert Solution

Trust is a tool created to manage an individuals’ asset prior to his death. It also specifies how the assets should be distributed after the individual’s death. The individual creating the trust is called the grantor.

Revocable Trust

Revocable trust is a type of trust that can be changed at any time. Provisions of the trust can be altered or canceled dependent on the grantor. Infact, the entire contents can also be changed. It allows one to change the beneficiary or the trustee of the trust. It is also called the living trust.

Advantages of revocable trust:

Flexibility: The settler will retain flexibility over the structure. The settler can add and remove beneficiaries. The settler can also decide in what proportion is to be made to the beneficiaries. It is easier t make amendments to a revocable trust than to a will.

Future incapacity: It can be structured for a scenario when the settler is incapacitated or suffer from medical problems. The decision-making can be included in the trust.

Availability of assets at death: Assets in a revocable trust are available at the death of the grantor. The assets can be used to pay estate taxes and other debts. The property in the trust remains in the trustee’s name before and after death. It is available for liquidation if need be.

An example would be when parents set up a trust for their kids and transfer all their property and assets to the trust. The assets will be distributed to the couple’s children in the manner specified in the trust even after the death of the parents.

Irrevocable trust

Irrevocable trust cannot be terminated or modified without the beneficiary’s permission. Assets placed in an irrevocable trust become the property of the trust permanently. The control and power of the assets transferred does not remain with the settler.

Advantages of irrevocable trust:

Estate tax: It helps to eliminate estate taxes.

Protection of assets: It grants protection of the assets since they are a separate entity from you. The gifts to the heirs remain intact even if someone sues and wins. It prevents the beneficiary’s creditors from accessing the trust.

Avoids probate: It is used to avoid the complications of a probate court. All assets transferred go directly to the trust property and avoids the probate.

An example of an irrevocable trust is when one is created without the help of an attorney. One of the provisions is not what you want. By the nature of the irrevocable trust, you cannot change it. You should get it right the first time so that there are no problems in the future.

I hope that was helpful :)


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