Revocable vs Irrevocable Trusts - Rhode Island Estate Planning Explained
What is the Difference Between Revocable and Irrevocable Trusts? Rhode Island Estate Planning Explained
You worked hard for all the assets you’ve gained throughout your life and after you’re gone, you want to ensure that your loved ones receive what you've left for them quickly and discretely. Having a Warwick RI lawyer set up a trust can help you accomplish that task. Here we explain the difference between revocable vs irrevocable trusts and which may be right for you
Leaving your possessions to your family, loved ones, or charity with a Will means your estate will have to go through probate, a process that can be expensive and stressful. The process can drag out for months or years before your beneficiaries receive their inheritance. But there are ways you can minimize or avoid the chances of your estate ending up in Warwick probate court – like using a trust.
Setting up a trust can save your loved ones the hassle and expense of probate and the added stress of filing Rhode Island Probate forms. With proper planning, trusts may also help you avoid tax burdens after your death, provide protection from creditors, and allows increased control over your estate for years after you pass away. However, not all trusts are created equal. To help you decide what kind of trust is right for you, we’ve put together a head-to-head comparison on irrevocable vs revocable trusts.
What is a trust?
First, it is important to understand who will be involved with a trust. There are three parties involved – the settlor (referred to also as a trust grantor or trustor), the trustee, and the trust beneficiary or beneficiaries. The settlor is the person who originates the Trust; the trustee is the person or company who manages the Trust and holds legal title to the Trust assets, and the beneficiaries are the people or charities who receive the assets from the Trust. Beneficiaries hold equitable title to the Trust assets.
A trust is a legal arrangement that allows a trustee to hold assets for a trust beneficiary or beneficiaries. Some items that you can place “In Trust” are money, real estate, vehicles, personal possessions, bank and investment accounts, businesses, and almost anything that you’d like to distribute after death. Like a Last Will and Testament, a Trust is a way to assign assets to your beneficiaries and stipulate conditions about how and when those assets can be used. Unlike a will, a trust is designed to bypass the Warwick Probate Court and to keep the contents of your Trust private and out of the public record.
Your Will only takes effect after you pass away, but most Trusts become effective the moment you create and fund it. How do you fund a Trust? Transferring assets or retitling assets to your Trustee is the process of funding a trust. Once the Trust is funded, the Trustee holds legal title to the assets within the Trust. Your Trustee has a fiduciary duty to protect the trust assets, act in good faith to follow the intent of the trust, and act in the best interest of your beneficiaries. After you pass away or sometimes during your lifetime, the Trustee will follow the provisions within your Trust document to distribute assets to your trust beneficiaries. The Trustee does not need the approval of a Probate Court to distribute assets, thus keeping your estate out of probate after your death. By cutting the Warwick Probate Court out of this process allows your beneficiaries to receive their inheritance sooner and with less expense.
Many people associate trusts with large or lavish estates and massive sums of money, but trusts aren’t only for the very wealthy. Most of the people in Rhode Island can benefit from setting up a trust. When an estate goes through probate, the Will that may list all of your possessions, and contain information about your family and beneficiaries becomes public record. You can use a trust to keep your beneficiaries and the contents of your estate private. Certain types of trusts avoid taxes, protect assets for special needs persons, protect assets from creditors and divorces, and even shelter assets to keep you eligible for public assistance programs like certain Medicaid benefits.
What is a revocable trust?
A revocable trust, also called a living trust or inter vivos trust, can be changed or revoked at any time while the trustor is still alive. If you change your mind about something, you can always add an amendment to the trust. This makes a revocable trust ideal for those who want maximum control over the trust, have a growing family, or for those who might change their mind as time goes by. You can be the grantor and the trustee of your revocable trust. This can allow you more control over your estate planning during your lifetime. You can also use trust assets to your own benefit if you have a properly drafted revocable trust by a reputable revocable trust attorney to allow maximum control over trust assets. Any Revocable trust taxes will pass through to your personal tax return on your 1040 form with the IRS and gains are not taxes on a separate return.
Revocable living trusts are a good option for younger adults or for those with smaller estates who still want to avoid probate. However, A revocable trust doesn’t come with the same benefits or protections as an irrevocable trust, like protection from estate tax. However, the threshold for estate tax at the federal level is $12.06 million but in Rhode Island, the estate tax is much lower set at approximately $1.65 million for 2022. Most people can avoid estate taxes, but those who own real estate and have a life insurance policy often have an estate large enough to trigger estate taxes.
What is an irrevocable trust?
Unlike a revocable trust, an irrevocable trust isn’t easily changed. Once you’ve finalized the details of an irrevocable trust, it can only be modified under extremely narrow circumstances and often requires court approval. This is one of the biggest drawbacks of an irrevocable trust. But for each irrevocable trust disadvantage, it also has its’ benefits.
Once you assign, or gift, assets to an irrevocable trust, you cannot remove the assets from the trust and you retain no control over those assets. If drafted properly, this can provide the shield for your assets from certain taxes, creditors, or lawsuits. Two of the most popular reasons to use an irrevocable trust are to protect your assets while qualifying for Medicaid benefits or to avoid estate taxes on a large estate. Rhode Island doesn’t have an inheritance tax, but large estates are still subject to an estate tax. Estate taxes can steeply decrease what your beneficiaries will have available to them.
Which is better Revocable or Irrevocable trust?
The answer to this question is a typical attorney’s answer…. It depends. It all depends on your specific goals for estate planning. The main difference between a revocable and an irrevocable trust is the level of control the trust grantor retains in the Trust.
A revocable trust offers flexibility and more benefits during your lifetime and offers the grantor the most control. If your main goal is to distribute assets to your beneficiaries while avoiding probate, then a revocable trust might be right for you.
On the other hand, if you want to avoid excessive taxes and asset protection is your main goal, then an irrevocable trust might be a better choice.
If you desire to have a little bit of both then some advanced planning with very technical estate planning tools may be needed to meet your goals.
How do I get a trust in Rhode Island?
To set up a trust in Rhode Island, you should contact Nappa Law to create a trust agreement, which will help lay out the terms of the trust. This includes transferring assets you want to be held in trust and assigning responsibilities to your trustee and naming beneficiaries.
While it’s possible to create a trust on your own, a Rhode Island estate planning lawyer can streamline the process and help you create a comprehensive trust to your liking.
Other ways to avoid probate in Rhode Island
It’s worth noting that trusts aren’t the only way to avoid probate in Rhode Island. You can use Pay on Death (POD) designations for bank accounts, or transfer on death (TOD) deeds for stocks and bonds.
Having joint ownership of bank accounts or property with another person can also help avoid probate. Depending on the type of joint ownership, the surviving co-owner can automatically own the asset, no probate necessary. Rhode Island also has a simplified small estate probate procedure for estates of $15,000 or less.
A good Rhode Island estate attorney can help you decide what the right choice is for your estate and help you create a comprehensive plan.
Where can I find the best estate planning attorney in Rhode Island?
Need help deciding which type of trust is right for your estate? Nappa Law can lend a helping hand.
As an experienced estate planning attorney in Rhode Island, Bryan Nappa can assess your situation and help you decide what’s best for your estate. He can answer all your questions, draft a trust document for you, and assist with your other estate planning needs. Bryan’s team of lawyers in Warwick RI have years of experience and look forward to helping you protect your assets.
Contact his office today to schedule a free consultation.