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Revocable and Irrevocable Trusts
If you’re like most people, you probably feel like you have all the time in the world to deal with financial planning for the future. You may well be right, but getting started early can make all the difference in how well your interests are protected.
At BK Law, our Boston estate planning lawyers know how to set up a living trust to ensure that everything you worked so hard for during your lifetime will be protected. Knowing your loved ones will benefit from your life long after you’re gone can bring you great peace of mind.
Trusts are one of the most popular ways to secure your assets in the event of your passing. With trusts, you can realize tax benefits, exercise flexible assistance options, and avoid the cumbersome probate process while you’re at it.
Here’s what you need to know about the two main types of trusts: revocable and irrevocable.
What Is a Revocable Trust?
A revocable trust, sometimes called a “living trust,” is a document that states how you want your assets to be handled after you die. Assets can include any valuable possession, accounts, investments, and real estate.
A revocable trust is a replacement for a will. This allows assets to go to a trust rather than go through the courts for probate administration.
A revocable trust is exactly what its name implies—it can be revoked anytime. Revocable trusts go the extra mile in protecting your interests while staying convenient and flexible for your needs. Essentially, a revocable trust is a living, editable category of protected assets, where the provisions can change at any time.
It keeps your assets in a static state, protecting them from excessive taxation or premature distribution, and allows them to be accessed at any time the terms of the agreement are met. You’re in control—as you should be.
Benefits of a Revocable Trust in Massachusetts
There are numerous benefits to having a revocable trust. In the event of a necessary shift, the trust creator can simply change the terms of the trust agreement. They’re also able to freely cancel the terms of the trust based on needs. This means if you unexpectedly need to access your liquid assets to help a sick family member or assist with another family emergency, you can do that. You can also give your family a streamlined process after passing through the associated tax benefits, which allows for the dispersal of the assets without formalized decree.
Disadvantages of a Revocable Trust in Massachusetts
It’s important to determine whether this type of future planning arrangement is right for you. To do that effectively, you need to evaluate the risks. Below are some of the disadvantages you may experience with a revocable trust:
- No probate court: As mentioned above, one of the benefits of revocable trusts is sidestepping the probate court process. Probate is an administrative court proceeding where a judge supervises debt payments and asset distribution. It can be incredibly time-consuming and expensive.
- No immediate tax benefit: If you were looking for a more immediate way to save on your taxes, you might consider looking elsewhere. You won’t necessarily save on income or real estate taxes with this type of trust.
- Creditors can still charge: Your assets in a revocable trust remain accessible to creditors. If you’re in severe, unresolved debt, you may want to consider what can happen if creditors can view and act on your assets.
What Is an Irrevocable Trust?
An irrevocable trust is a more limited version of a revocable trust. While your assets remain the same, you can’t make changes after the trust has been established. It’s protective of the beneficiaries and assets in the sense that it can’t be revoked, but it can be challenging to use if changes need to be made.
What Are the Benefits of an Irrevocable Trust in Massachusetts?
Irrevocable trusts can be limited in some areas, but they can also be a practical choice with a lot of benefits. For example:
- If you’re sick or in danger of becoming disabled: Irrevocable trusts can protect your current assets so that you’re still eligible for disability and social assistance if your situation requires it. Otherwise, the government may deny you if it appears you earn too much.
- If you’re looking for lower taxes (and let’s be honest—who isn’t?): If you’re looking to save come tax season, this is an excellent choice. There are a variety of different tax savings opportunities available. One of the most popular is the irrevocable life savings option, which can help your beneficiaries avoid paying estate tax when you pass.
- If you want to protect your assets: Creditors cannot touch assets housed in an irrevocable trust. If you want more liquid assets available to your beneficiaries but are dealing with pretty substantial debt, this may be an excellent option to consider.
What Are the Disadvantages of an Irrevocable Trust in Massachusetts?
While there are some benefits to pursuing an irrevocable trust, there are significant drawbacks as well. We’ve listed some of the main ones below:
- Flexibility: Once you create the terms for your irrevocable trust, it’s set in stone. With very few and difficult-to-navigate exceptions, you can’t revise, even if your situation changes.
- Listed beneficiaries: If you transfer an asset to the trust, you can’t really go back for any reason. This means you have to make solid, permanent decisions about who your beneficiaries will be. Your choice, like a marriage, is for better or worse—except you don’t have the option of divorcing your choices after you sign the terms.
- Court Access: If you’re considering throwing your assets into an irrevocable trust to avoid losing them in divorce or a lawsuit, don’t bother. The court can still access and act on whatever assets you have if they believe it was done in preparation for legal action.
Who Are the Main Parties Involved in an Irrevocable Trust in Massachusetts?
Irrevocable trusts have a very short list of involved parties. There are three main types of individuals involved in this type of trust process:
- Beneficiaries: These are the people who can benefit from the trust and who must be formally listed in the trust terms.
- Grantor: This is the person who places the assets into the trust and draws up the trust’s terms.
- Trustee: The trustee is considered to be a “guardian” of the trust and is to whom the asset ownership is transferred when the grantor makes the decision to put an asset into the trust.
What Are the Main Types of Irrevocable Trusts in Massachusetts?
There are many different types of irrevocable trusts. Some of the top options include:
- Life Insurance Trusts: These remove the life insurance proceeds from your estate, resulting in significant tax savings.
- QTIP Trusts: These trusts lessen the familial burden by pushing off estate tax until both spousal members of the trust have passed.
- QDOT Trusts: The same goals of QTIP trusts apply here, but these are for spouses who have married someone who is not an American citizen.
- Charitable Lead Trusts: These occur when you put assets in your trust and set up regular directed donations to a charity of your choice. These are a type of gifting trust, which will continue to give for a set duration of time. A beneficiary will then receive the rest.
- Generation-Skipping Trusts: These are great for wealthy individuals and allow you to name a child as your beneficiary. As they won’t own the property (ownership lies with the trust), you can avoid estate tax.
- Charitable Remainder Trusts: The opposite of a Charitable Lead Trust. You name a beneficiary to receive donations over a set time, switching it to a charity to get the remainder.
What Are the Key Differences between Revocable and Irrevocable Trusts in Massachusetts?
There are many differences between revocable and irrevocable trusts, which include:
- Flexibility: Irrevocable trusts are inflexible. Revocable trusts allow you to shift and make changes where necessary.
- Federal Estate Tax Benefits: Irrevocable trusts can help you avoid estate tax, while revocable trusts cannot.
- Ownership: Irrevocable trusts own all assets transferred to them. Revocable trusts may have flexible ownership based on the situation.
- Protection: Revocable trusts offer far less protection compared to irrevocable trusts. Irrevocable trusts are the only category of trusts protected against creditors.
How to Determine Which Type of Trust Is Right for You?
Choosing a trust is a very personal decision. To determine what type of trust is right for you, consider your end goal. Are you confident in your long-term choice of beneficiaries? Do you want flexibility, or do you value tax exemption more? Answering these questions can help you to determine if you need an irrevocable or revocable trust.
Trusts & Tax Avoidance in Boston, Massachusetts
Depending on the trust type you choose, you may be eligible for tax avoidance.
Are Irrevocable Trusts Eligible for Estate Tax Avoidance in Massachusetts?
Yes. Generally, irrevocable trusts are eligible for lower estate taxes and remain protected against any sort of financial consequences from delinquent creditors.
Are Trusts Eligible for Capital Gains Tax Avoidance in Massachusetts?
Yes, depending on the length of time the asset has been held in the trust. Your estate lawyer can help you determine if your trust terms make you eligible for this benefit.
How Can Estate Planning Attorneys Help with a Revocable/Irrevocable Trust in Massachusetts?
Estate planning attorneys can help you choose the best trust option for you—whether you want to go with the more flexible, revocable trusts or a more protective irrevocable trust.
Among the many trust administration services an estate planning attorney can provide are:
- Make sure you understand the distinctions among different types of trusts
- Create the necessary paperwork to set up a trust for your estate
- Help you determine how you want to divide your estate, who should receive it, and the timeframe in which you want assets distributed
- Help you think through ways to protect your wealth from creditors
- Assist with naming a professional fiduciary if necessary
- Provide guidance to any named fiduciary in the administration of your estate after your passing
- Notify beneficiaries and government organizations of your death, including entities such as the Social Security Administration, Veterans Affairs, Department of Health, banks, mortgage companies, and more
If anyone contests your trust, an estate planning attorney can handle the legalities.
Contact BK Law Today
Estate planning isn’t easy. Just getting started can be difficult because there’s so much to consider and thinking about the legal issues as well as the sentimental ones can take a toll.
At BK Law, we have decades of experience helping clients successfully navigate the estate planning process. It’s important to us to help you deal with the delicate balance between the financial concerns and emotional concerns that often come with discussions of future planning.
We take pride in representing our clients with honesty and integrity as you deal with sensitive financial issues. You deserve the exceptional legal representation our estate planning attorneys offer to all our clients.
Give us a call to arrange a consultation. We’ll review your financial situation and discuss your options. Let us show you how we can help secure your future and give you peace of mind. Don’t hesitate to contact our Boston law offices to speak with one of our accomplished attorneys today.