Revocable and irrevocable trusts

A will is the most common way to transfer assets upon the owner's death. But using a will alone often means some assets may be distributed through the legal process of probate—a public process that may invite scrutiny of a family’s wealth, and result in significant cost and delay. Fortunately, estate planning trusts can provide more control over how assets are distributed, and often help a family avoid the probate process.

What is a trust?

A trust is a legal arrangement between the owner of assets (the grantor) and another person or institution (the trustee). The grantor places assets into the trust, which takes ownership of them. It is then administered by the trustee under the terms of the trust documents for the benefit of one or more individuals, charities, or institutions, called beneficiaries.

What is probate?

Probate is the legal process of distributing assets after death. If the decedent has a will, the probate court will confirm its validity and order the executor to distribute assets to the beneficiaries per the terms of the will. If the decedent dies without a valid will, assets are distributed per the state’s intestate law. Since it is a legal process, probate involves court fees (and potentially attorney’s fees), can delay the distribution of assets, and becomes a public record. Additionally, a will can be contested which can further delay the process and add more expenses.

Avoiding probate with a trust

Assets held in trusts are generally distributed outside of the legal process of probate, because they're not controlled by the decedent’s will. Probate proceedings are a matter of public record, so if preserving the privacy of your beneficiaries and/or the disposition of your estate is important to you, a trust may be an appropriate strategy to consider. What's more, if assets are located in different states, it may be necessary to go through probate proceedings in each separate jurisdiction. That can generally be avoided by placing such assets into a trust.

Types of trusts

In broad terms, trusts are either revocable or irrevocable. Generally, a revocable trust can be changed (or revoked) during a grantor's lifetime, while an irrevocable trust can't be changed without the permission of the beneficiary.

Revocable trusts

With a revocable trust, also known as a living trust, the grantor always has the option to change or even terminate the arrangement at any time (i.e., it can be revoked). Because the grantor retains control of the property, the assets will be included in the grantor's gross estate at the grantor's death and may be subject to estate taxes. Similarly, for income tax purposes, the trust is treated as if it does not exist and all income and deductions appear on the grantor's personal income tax return.

Irrevocable trusts

With an irrevocable trust, generally speaking, the grantor permanently relinquishes control of the assets placed in the trust. Therefore, an irrevocable trust can be designed so that the trust's assets are not included in the grantor's gross estate, thereby sheltering them from potential estate taxation. Typically, the trust is designed as a tax entity separate and distinct from the grantor who created it. In fact, one of the main responsibilities of the trustee normally is to file the trust's annual income tax return (IRS Form 1041) for each year of its existence. Please note that gift tax rules usually apply if assets are transferred to this type of trust during the grantor's life. Consult your attorney or tax advisor regarding your specific situation.

Other advantages of a trust

  • Control of wealth: The grantor can specify the terms of a trust precisely, controlling when and to whom distributions may be made. The grantor may, for example, set up a revocable trust so that the trust assets remain accessible to the grantor during the grantor's lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
  • Protection of legacy: A properly constructed trust can help protect the trust assets from the beneficiaries, creditors, or from unwise decisions by beneficiaries who may not be adept at money management.
  • Privacy and probate savings: Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to avoiding the costs (including attorney's fees) and delays associated with the probate process.
  • Management and recordkeeping: The trustee assumes the responsibilities related to managing property and investments held in a trust, along with recordkeeping tasks and the periodic filing of income tax returns.

Which type of trust is right for me?

The type of trust you choose will depend on your particular circumstances, as each has benefits and drawbacks. For example, while an irrevocable trust may provide assurance that the assets held in trust are not part of your estate, you generally will lose any chance of accessing that money should your circumstances change. By working with your attorney and your accountant, you can help ensure that the trust you choose will meet your long-term needs, for both your lifetime and your estate.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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