Insight on Estate Planning

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Estate Planning Pitfall: You’re Using the Wrong Type of Living Trust

You may have already recognized the benefits of using a living trust. Typically, this trust type makes sense if you’re looking to preserve assets for other family members without dire tax consequences or to avoid probate. But should you use a “revocable” or “irrevocable” living trust? The answer can make a big difference. Significantly, if you choose the wrong type of trust, it can defeat your main intentions.

As the name implies, a revocable trust allows the creator of the trust to modify it in the future. This means, for example, that you can remove, add or otherwise change beneficiaries or revise the trust terms due to changing circumstances.

In contrast, with an irrevocable trust, you don’t have the ability to make such modifications. Except for extraordinary situations, the trust terms are set in stone. So, you can’t remove a beneficiary or add another one later.

At first glance, a revocable trust seems preferable, but there are several potential disadvantages to consider. Notably, assets aren’t shielded from creditors the way they’re protected in an irrevocable trust. The trust assets may have to be liquidated to pay off certain claims. In addition, revocable trust assets are included in the taxable estate of the person who created the trust. This could result in sizeable federal or state estate tax liability — or both.

On the other hand, if structured properly, the assets in an irrevocable living trust generally are removed from the creator’s taxable estate. This is often one of the main reasons for choosing an irrevocable trust.

About The Authors

A professional headshot of Kristin Matsko in front of windows.

Kristin N. Matsko

Kristin, Co-chair of the firm’s Trusts & Estates Group, counsels individuals and fiduciaries on a wide variety of trusts and estates… Read More

A professional headshot of David Riedel in front of windows.

David T. Riedel

An author and frequent lecturer on estate planning, administration and taxes, David provides responsive, sympathetic and personable counsel to his varied… Read More

A professional headshot of Kathryn Windsor in front of windows.

Kathryn S. Windsor

Kathryn is a member of the firm’s Tax Group and represents clients in a variety of tax law matters. Her practice… Read More

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