Revocable versus Irrevocable Trusts

An intervivos trust — a trust you set up that goes into effect while you’re still alive — can be either revocable, meaning that you can change your mind, or irrevocable, meaning 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.


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!


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.


So if you only get a break on estate taxes with an irrevocable trust, why would anyone want to use a revocable trust without the estate tax break? Estate tax savings is only one of the reasons you may consider including a trust in your estate planning. If your estate’s value is no where near the federal estate tax exemption, then you really don’t need to be concerned about federal estate-tax-saving tactics.


Your motivation for setting up a trust may have more to do with estate protection or helping out a charity, but you also may want a safety valve that allows you to pull money out of a trust if circumstances change in some way.


Make sure to work with your accountant to understand any and all tax implications — gift, federal estate, and state inheritance or estate — for property transfers to both irrevocable and revocable trusts. He or she can help you set up the right provisions and avoid unpleasant tax-related surprises from the government because of some provision of the tax code you didn’t know about.











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Source:http://www.dummies.com/how-to/content/revocable-versus-irrevocable-trusts.html

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