Law Office of Rick Todd Blog

Thursday, July 14, 2016

The Difference Between Irrevocable and Revocable Trusts

You might have heard that the terms “irrevocable” and “revocable” with regard to trusts. Lawyers and people who have created an estate plan like to throw these terms around, but they are often misused by both parties. They also can be manipulated by lawyers to confuse clients into purchasing something that is expensive and unnecessary.

“Revocable” generally refers to a revocable living trust. A revocable living trust is a trust that is used to avoid probate, or at least to minimize how much of an estate is exposed to probate administration. It is not, I repeat, not able to protect you from any form of taxation. If someone tries to sell you a revocable trust based on its tax benefits, look elsewhere.

“Irrevocable” refers to irrevocable trusts, of which there are several kinds that can protect you from estate taxes or death taxes. The difference between irrevocable trusts and revocable trusts is that the asset placed into an irrevocable trust is, for all intents and purposes, permanently part of the trust and cannot be taken back by the trustor (you). The IRS at that point views the asset as separate from your estate and you can use irrevocable trusts to reduce the size of your estate in order to pay less or no estate tax.

Both these trusts have one thing in common: they are far too complex for someone to draft by themselves. You can certainly try, but because they require the retitling of deeds and, in the case of irrevocable trusts, increased levels of IRS scrutiny in the form of more tax returns, only a lawyer should draft them. That means they cost money.

Revocable trusts are not recommended by this attorney as long as you live in Columbia and the state of Maryland. Every county in this state, including Howard County, has a probate process that is streamlined and affordable and there is no point in trying to dodge it. That may not be true in all states.

Irrevocable trusts are essential, but only for people of incredible wealth who are exposed to the estate tax. As of this writing that means an estate worth more than 5.45 million dollars (2 million for the Maryland estate tax). That’s a very small percentage of the population. Additionally, the Maryland estate tax exclusion will increase to three million next year, so very few people qualify. 

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The Law Offices of Rick Todd has offices located in Columbia, Chevy Chase, Fairfax, Virginia, and Maryland and serves clients throughout Clarksville, Columbia, Ellicott City, Fulton, Rockville, Bethesda, Potomac, Laurel, Howard County, Montgomery County, and Washington D.C.

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