If you are planning a trust-based wealth management strategy, should your trust be revocable or irrevocable? The answer turns on your objectives for the trust.
A revocable trust may be freely amended at any time by the creator of the trust. In fact, such a trust may be terminated, for any reason or no reason, should the trust creator have a change of heart. Typically, the creator and his or her spouse are the beneficiaries of such a trust. As such, there are no immediate tax advantages, nor are there tax consequences. The main benefit of a revocable trust is professional management of the trust assets, provided the trustee is an experienced fiduciary such as Garden State Trust Company.
The revocable trust provides continuous financial protection in the event of the beneficiary’s incapacity, avoiding the need for a financial guardian. Finally, the revocable trust avoids probate. As such, it may help to reduce the costs of estate settlement and provide a measure of financial privacy for the family. Normally, the terms of the revocable trust are not published, as the terms of a will must be by law.
As the name suggests, irrevocable trusts cannot be freely changed or terminated. Therefore, they have an independent status for tax purposes. Income and gift tax deductions are permitted to contributions to irrevocable charitable remainder trusts (unitrusts or annuity trusts). A gift to an irrevocable trust will be subject to the federal gift tax (2015 lifetime exemption of $5.43 million per taxpayer). Once placed in the irrevocable trust, the assets will not be included in the donor’s taxable estate at his or her death.
In advanced tax planning, a variety of somewhat exotic irrevocable trusts may be explored, such as the Grantor Retained Income Trust, the Grantor Retained Annuity Trust, the Qualified Personal Residence Trust and the Intentionally Defective Grantor Trust.