Revocable Trusts vs. Irrevocable Trusts: Which Trust Is Right for Your Clients?

Charitable Giving

If assets are put into an irrevocable charitable trust while the grantor is still alive, the trustmaker can take a charitable income tax deduction for those assets. If the initial transfer of assets into such a trust doesn't take place until after the trustmaker's death, the estate will receive a charitable estate tax deduction.

Protecting Assets From Nursing Homes

One important concern to keep in mind with a revocable trust is that those assets are still exposed to nursing homes. If a client ends up needing long-term nursing care, the money in a revocable trust that was intended to be left as part of an estate can be used for those bills instead.

At the same time, some people end up being too clever by half by pushing assets into an irrevocable trust, thinking they will be safe there, and nursing homes or other long-term-care facilities won't be able to touch that money. Too many people end up needing the assets they've given to an irrevocable trust — and can't get them back because the owners of the trust have died, or are going through a difficult divorce, or otherwise can't afford to sacrifice those assets for the original trustmaker.

What Is a Revocable Trust?

A revocable trust is literally the opposite of an irrevocable trust, in that the provisions can be altered or canceled by the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death do assets transfer to the beneficiaries. (Check out potential tax changes that could effect these trusts in the 2017 tax reform bill.)

Benefits of a Revocable Trust

So what benefits does a revocable trust have, aside from the obvious one that the grantor can revoke it? Many grantors create a revocable trust to avoid probate, which it certainly does, but an irrevocable trust accomplishes that as well.

Related: 10 Facts to Know About Revocable Trusts

A revocable trust specifically works well for a client who doesn't have serious tax issues, but wants to maintain control of his or her assets. But there's one other scenario in which they can make a lot of sense: for a client who fears he or she will eventually be mentally incapacitated, whether that's because of family history or for some other reason.

If the grantor of a revocable trust becomes incapable of managing his or her affairs, the designated trustee steps in to handle the assets. The trust can even set forth specific steps and guidelines that the successor trustee must carry out.

That, then, might be the ideal candidate for a revocable trust: a client who wants to maintain control over his or her assets, right up until the moment he or she can no longer mentally handle the job, at which point a designated trustee is ready to step in. In most other instances, the irrevocable trust makes more long-term financial sense.

— Related on ThinkAdvisor:

• 9 Ways New Tax Law Could Affect Clients' Estate Plans
• Hidden Factors Could Cost Your Life Trust Client Money
• Clock Is Ticking on SLAT Estate Tax Exemption
• Tax Overhaul Gave Clients With Irrevocable Life Trusts Work to Do

Tom Nawrocki is a financial communications professional, with deep writing experience throughout the industry. He was formerly president and editor in chief of Triton Financial Newsletters, a full-service financial communications shop. He was also a longtime editor at Worth magazine. He can be reached at TomNawrocki.com.