There are many differences between a revocable trust and an irrevocable trust when it comes to tax and legal consequences. It is important to understand the difference between these two different types in order to make sure you are making the right choice for your needs.
In case of an irrevocable trust, all the assets transferred to the trust belong to the trust and not to be Grantor. It’s also important to understand that assets are there for the benefit of the Grantor but the legal ownership belongs to the trust. In case of a revocable trust, the ownership of the assets is retained by the Grantor.
In case of an irrevocable trust, the asset ownership lies with the trust which means the assets are not included in the estate tax calculations at the time of death. On the other hand, the ownership lies with the Grantor in case of a revocable trust and the assets are included in the calculation at the time of death for the purpose of estate taxes. In other words, irrevocable trust protects from estate taxes whereas revocable trust does not.
As the name suggests, no changes can usually be made to an irrevocable trust agreement. On the other hand, the agreement can be revoked or modified at the Grantor’s discretion in case of a revocable trust. It’s also important for you to know that under certain conditions, changes can be made to the agreement in case of an irrevocable trust.
When it comes to a revocable trust, the trust is granted its own tax identification number. The trust pays the tax itself or issues a K-1 to the Grantor. On the other hand, the taxpayer has to show everything in their own tax return in case of a revocable trust.
In case of an irrevocable trust, the trustee is usually an independent person who has a fiduciary duty to protect the assets under the trust. The trustee is supposed to exercise independent control over the assets of the trust. In case of a revocable trust, the Grantor usually also serves as the trustee and maintains complete control over the trust assets.
Overall, the major difference between these two types of trusts is the purpose. An irrevocable trust is established for protection of assets as assets included in an irrevocable trust are protected from estate taxes and probate process. It also protects the assets from frivolous lawsuits whereas a revocable trust is usually established only to avoid the probate process.
As far as choosing between these two types of trusts is concerned, it depends on the needs of the Grantor. It is recommended to consult with an expert in order to determine the appropriate choice for a particular situation.