Revocable trusts are the most common type of trust. Setting up a revocable trust is relatively easy, allows for flexibility and helps with a number of estate planning goals. Part of the appeal, as the name name implies, is that when a revocable trust is established, the grantor who creates it retains control of the assets, and can make changes at any time.
Understanding the Advantages of Trust Types
Revocable trusts are popular estate planning tools for a number of reasons, especially their flexibility: “Revocable trusts are more flexible than irrevocable trusts — the revocable trust maker can change the revocable trust at any time, or transfer the property out of the revocable trust at any time without getting permission from anyone.” Among the other advantages of revocable trusts:
Revocable trusts will typically have no impact on the trust maker’s income taxes, which is usually desirable, and the trust maker will continue to claim the income taxes from the trust on their individual return, which is usually less costly. Trust makers form and transfer assets into revocable trusts most commonly because revocable trusts can:
- Avoid probate
- Allow for a step-up in basis on assets to reduce or eliminate capital gains taxes
- Allow both of the revocable trust makers to use their combined exemptions from estate tax
- Provide instructions for the disposition of assets
- Be structured to protect assets for the trust maker’s beneficiaries after the trust maker dies
Despite their usefulness, however, revocable trusts do have some limitations, as compared with irrevocable trusts. Specifically, “only an irrevocable trust can protect assets for the trust maker themself.” Asset protection is possible via an irrevocable trust, because when creating the trust, the grantor actually relinquishes ownership of the designated assets. Accordingly, the assets placed in an irrevocable trust are essentially shielded from creditors, and even eligibility for public benefits, like Medicaid, can become possible. Relatedly, another big difference between revocable and irrevocable trusts is that the grantor can be a trustee of a revocable trust, but never the trustee of an irrevocable trust.
When establishing any type of trust as part of an estate plan, it’s important to be clear on the related goals, and work with an attorney to tailor a plan accordingly. For example, since irrevocable trusts require the relinquishment of assets, they can be a particularly effective tool for families anticipating the need for public benefits to assist special needs individuals or elders who may require long term care. Either revocable or irrevocable trusts can be helpful for families seeking privacy and speed in transferring assets to designated beneficiaries, since assets gifted through trusts do not go through the public probate process, as assets left in a will do. Some estate planners even recommend setting up both revocable and irrevocable trusts to “get the unique advantages of both types of trusts.
Trustees and Trustee Bonds Explained
When trusts are established, trustees are named to administer the assets in them, based on the arrangements specified in the trust agreement. Trustees have fiduciary obligations and are held to exceptionally high legal standards,“the most important of which are the duties of loyalty and care, and the duty to act in accordance with the terms of the trust agreement.” Given the seriousness of the role, trustee bonds are sometimes required. Essentially, a trustee bond is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with applicable state law. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain trustee bonds: Just get a quote online, fill out the information, and enter a payment method. Then, simply print or e-file the bond from anywhere.
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