As dedicated healthcare professionals, you work tirelessly to care for others and ensure their well-being. But what about your own future and the financial security of your loved ones? Have you ever considered setting up a trust to safeguard your assets? If so, you might have come across two unknown terms, revocable vs irrevocable trusts. These trusts offer advantages and disadvantages, and understanding their differences can help you make decisions about your estate planning. Let’s explore revocable vs irrevocable trusts and see how they may fit into your estate plan.
What is a Trust?
Before we explore revocable vs irrevocable trusts, let’s review general trust basics. A trust is a legal entity that holds assets for the benefit of individuals or organizations. It has distinct rights. The trustor creates the trust, and the trustee manages it. Unlike a will, a trust avoids probate court. This means your assets are transferred privately. Learn more about trusts. Let’s explore the characteristics of both revocable and irrevocable trusts.
What is a Revocable Trust?
Think of a revocable trust as a living, breathing entity. It allows you to control your assets while you’re alive. A revocable trust is also known as a living trust. The best part of a revocable trust is that you can adjust it as your needs change. Life is full of ever-changing circumstances. A revocable trust recognizes this and gives you the flexibility to alter or revoke it at any time. This is especially handy if you experience significant life changes, like marriage or divorce. Updating beneficiaries is an example of when you may need to change your revocable trust. A downside of a revocable trust is your assets are subject to lawsuits and creditors. As owner and manager, the assets in the trust are indistinguishable from your own. The same holds true for taxes. The IRS does not recognize a revocable trust as a separate entity. Any income made by the trust is claimed on the owner’s tax return. And your beneficiaries are responsible for estate taxes.
What is an Irrevocable Trust?
Let’s explore irrevocable trusts. Irrevocable trusts are “set in stone”. Once you’ve set up an irrevocable trust and transferred your assets into it, you lose control of them. Generally, you can’t make major changes without the consent of the beneficiaries. Irrevocable trusts offer an added layer of protection for your assets. Since the assets legally belong to the trust, you no longer own them. And you are no longer responsible for them. This helps shield the assets from creditors and potential lawsuits. Taxation is different for the irrevocable trust too. The IRS recognizes irrevocable trusts as a separate entity, with its own identification number and tax return. But the tax obligation depends on the power of the trust. Assets in an irrevocable trust may be excluded from your taxable estate. This can help reduce the estate tax burden on your beneficiaries. Because trust laws vary, consider talking with an attorney for guidance on irrevocable trusts and taxation.
Setting Up a Revocable vs Irrevocable Trust
Although you can set up a trust on your own, consider speaking with an attorney for guidance. Trusts are complex legal documents. An attorney can help ensure it is done correctly. Learn more about setting up a trust in this post.
As a nurse, your dedication to caring for others extends to your loved ones’ financial security. Setting up a trust can help you protect your assets and avoid probate. Deciding between revocable vs irrevocable trusts depends on your needs. Revocable trusts offer flexibility and control. While irrevocable trusts help provide enhanced asset protection and potential tax benefits. Consider your estate planning goals and needs. Consider speaking with an attorney for trust guidance. Planning for your future today can help ensure peace of mind for tomorrow.
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Georgene Collins, RICP®, RN, PhD, MBA is a registered nurse turned Financial Advisor at Airey Financial Group. Georgene helps other nurses take control of their finances and prepare for retirement. Georgene began her career with Airey Financial Group in 2017 after retiring from 30 years in healthcare.
Georgene holds the Retirement Income Certified Professional (RICP®) designation from The American College of Financial Services. She holds health and life insurance licenses and a long-term care certificate in Indiana and Illinois. Georgene is a Registered Representative and Investment Advisor Representative and has earned the FINRA Series 63 and 65 registrations.