Understanding the Revocable Trust and Irrevocable Trust
What is a trust? A trust is a document, made legalized through the power of an attorney and application of law principles, which specifies the assignment of declared assets upon the death of an individual. A trust should not be used as a substitute for a will but instead, in conjunction with it. Furthermore, a trust helps protect the assets that the beneficiaries would receive and so as decrease the burden of estate tax.
There are different types of trust and the most common is the living trust. This type of trust is activated while the person, who applied for it, is still living. The process taken here is simple. The person would just have to move the assets into the trust and they would immediately become a part of it.
There are two categories under a living trust. These are revocable trust and irrevocable trust. The difference between the two is very clear. Revocable trust can be changed or revoked while the other one is not. However, the definition of the two is quite intricate.
Defining Revocable Trust
A revocable trust is a legal document stating that a set of assets will automatically be directed to the declared beneficiary upon the death of the applicant or trust holder. Most of the time, revocable trust includes cash but it can also be tied up with a checking or savings account. Since it is revocable, the trust holder can change the terms of the trust anytime as long as he/she is still living. Also, the holder can access the assets in the trust in case of emergencies.
The word “revocable”, when applied to financial organizations such as the IRS, refers to bank accounts with payable-on-death provisions. Interested applicants can simply fill out the forms provided by the bank and state who will receive the funds contained in the account upon the applicant’s death. This provision works similarly like a trust. Also, this is a great account management scheme where the applicant is given the power to allocate his/her account.
Defining Irrevocable Trust
An irrevocable trust is a complex type of legal agreement. It is considered as a separate entity. Here, a federal tax identification number is required. This is usually filed by the tax attorney or the accountant. The applicant would have to go to the state’s Bureau if Internal Revenue and comply with the documents needed for this transaction.
Since the trust is irrevocable and is a separate entity, the creator of the trust will have no access to the assets deposited under it. These assets will also not be owned or could not be touched by the beneficiaries until they are released. For example, if the creator has established a $200,000 trust account and the agreed term is that $10,000 will go to the beneficiary every year, no one could receive and release the money prior to that term. So, the beneficiary would just have to wait another year before he/she will get the other $10,000 until such time that the whole account will be empty.
What type of trust will work for you?
An estate plan is important in order to properly assign one’s assets to intended beneficiaries. Estate planning may cover both revocable and irrevocable trust. Considering which one is right for you would entail an understanding on how you want your assets to be handled upon death, how flexible you would want them to be while you are still alive and what type of assets you will be leaving behind. Any of these trusts has different consequences and benefits. You can consult a legal consultant (such as an attorney) in order to have a clearer view on the type of trust that you can avail and their agreements as well.