There are many benefits to setting up a trust, and a wide variety of trusts can be created, depending on your objectives. These legal instruments fall into two primary categories — trusts can be either revocable or irrevocable. Although both types of trusts share some common attributes, there are several key differences. Whether you’re considering a trust as part of your estate plan, to manage investments, or protect your assets from creditors, it’s important to know the difference between revocable and irrevocable trusts.
A trust is a legal arrangement that allows a third party to hold assets or property on behalf of a beneficiary. Property is transferred into the trust by the creator — known as the “trustor” — and the assets are retitled in the name of the trust. A party referred to as the trustee acts as the custodian for the trust. The trustee is responsible for managing the assets in the trust and administers the trust to the beneficiaries in accordance with the terms of the instrument.
Each type of trusts holds assets and property on behalf of a beneficiary — but there is one key difference between revocable and irrevocable trusts. While the terms of a revocable trust can be modified at any time, an irrevocable trust usually cannot be changed or amended. Notably, each type of trust comes with its own pros and cons based on the creator’s intentions. Even though both revocable and irrevocable trusts can avoid the lengthy and costly probate process, only irrevocable trusts come with estate tax advantages.
Irrevocable trusts come in two different forms — living trusts and testamentary trusts. A living trust, which is also referred to as an inter vivos trust, is created and funded by the trustor during their lifetime. These types of trusts can include irrevocable life insurance trusts, grantor-retained annuity trusts, lifetime gifting trusts, and charitable remainder trusts. In contrast, a testamentary trust is established after the creator’s passing and is funded in accordance with the terms of their will.
While an irrevocable trust may be created for several different reasons, they are often used to help with the following:
It’s crucial to be aware of the disadvantages that can come with setting up an irrevocable trust. Not only is the grantor required to relinquish control of their assets, but an irrevocable trust has no flexibility — you would not be able to access the funds in the trust even if you needed them for a specific purpose.
Revocable trusts are a critical component of estate planning and there are virtually no downsides to establishing this type of arrangement. While these trusts often serve many of the same objectives as a will, they can also be used to avoid probate when you pass away. Unlike an irrevocable trust, a revocable trust can be modified, amended, or revoked at any time upon the wishes of the trustor.
With a revocable trust, the trustor can designate themselves as both the trustee and beneficiary of the trust. There is no difference between the trustor owning assets in their own name — versus in the name of the trust. Upon the trustor’s passing, a revocable trust automatically converts to an irrevocable trust. Since this type of trust is effective during the trustor’s lifetime, it can help to manage their assets and property in the event of incapacitation, illness, or disability.
Whether you’re the beneficiary of a revocable or irrevocable trust, there can be many reasons disputes arise. One of the most common reasons for trust litigation stems from a trustee’s mismanagement, wrongdoing, or breach of fiduciary duty. If a trust has multiple trustees, there may be disagreements among them about what is in the best interests of the trust. It’s also not uncommon for conflicts to arise between beneficiaries and trustees in connection with the distribution, investment, or control of trust assets.
In addition to bringing a legal claim in connection with how the trust is being managed, the trust itself can be challenged if it was created under duress, by coercion, or at the time the trustor was incapacitated. Other grounds upon which a trust instrument might be contested can include allegations of fraud, ambiguous trust terms, and misappropriation of the assets. Although some trust disputes may be resolved using an alternative dispute resolution method such as mediation, these cases can be extremely contentious and require the need for litigation in the courtroom.
If you are facing a trust dispute, it’s essential to have knowledgeable legal counsel by your side who can safeguard your interests. Located in Rolling Meadows, Litico Law Group is dedicated to serving the needs of trustees and trust beneficiaries in Illinois and protecting their rights in litigation. We welcome you to contact us by filling out our online form or calling (847) 307-5942 to schedule a consultation to learn how we can assist you.
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