Michigan Revocable vs. Irrevocable Trust: Understanding the Key Differences

This blog post about revocable and irrevocable trust differences by estate planning and elder law attorney Nicole Wipp at the Family & Aging Law Center, PLLC is not legal advice. It is for informational purposes only. For advice about whether a revocable living trust or irrevocable trusts are right for you in Michigan, contact our firm at (248)278-1511.

As we consider estate planning options, trusts are often at the forefront of discussions. A trust is a legal tool allowing a person to transfer their assets to a trustee and distribute them to beneficiaries according to their wishes.

But when choosing between a revocable or irrevocable trust, the choice can be difficult if you don't understand which to use and why. In this blog, we’ll delve deeper into the key differences between the two types of trusts and identify situations where each would be beneficial.

Revocable vs. Irrevocable trusts: Key Differences

Firstly, a quick overview of the two trusts. A revocable trust can be changed or revoked by the trust maker (person who creates the trust) during their lifetime.

In contrast, an irrevocable trust cannot be changed once created. Both trusts operate similarly in allowing the trustmaker to transfer their assets into a trust, with a designated trustee holding these assets for the beneficiaries.

One of the main advantages of a revocable trust is flexibility. As the name suggests, a revocable trust can be amended or entirely revoked by the trust maker, which is particularly useful if circumstances change or if they want to change their beneficiaries. However, one of the main disadvantages of this type of trust is that it does not offer asset protection, like an irrevocable trust. Creditors can claim the assets in the trust because the trust maker still technically owns and controls the assets.

On the other hand, an irrevocable trust is specifically designed to protect assets from creditors and lawsuits because the trust maker no longer technically either owns or controls the distribution of assets within the trust. Another benefit is that it can minimize estate taxes and help with Medicaid eligibility.

Revocable And Irrevocable Trusts: Which Is Right For You?

When deciding between a revocable or irrevocable trust, it is important to consider family dynamics, estate planning goals, and future financial needs. If you aim to protect against creditors, minimize taxes, and preserve assets for future generations, then an irrevocable trust could be an excellent option.

However, if flexibility is a priority, or no asset protection is needed, a revocable trust may be more suitable.

It is also important to note that there are several other types of trusts, including testamentary trusts, special needs trusts, and charitable trusts. It’s worth seeking advice from an estate planning attorney to determine which type of trust will best meet your specific needs.

What Are The Benefits of Revocable Trusts?

A revocable trust is a type of trust that gives the person who creates it, also called the grantor, the power to modify or revoke it. A revocable trust can be amended, changed, or even completely revoked at any time at the grantor's discretion.

Another benefit of the revocable trust is that since the grantor maintains control of the assets placed in it, they can choose to utilize the funds or property as they see fit. Additionally, because revocable trusts help avoid probate, assets in them can be distributed more efficiently and faster than assets that have to go through the probate process.

They also pass through probate without the need for a court-supervised process.

Curious to learn more? Read everything you need to know about revocable living trusts - click here.

Disadvantages of a Revocable Trust

However, it's important to note that the control offered by a revocable trust comes with disadvantages. For instance, assets held in a revocable trust remain liable to creditors and legal judgments against the grantor, which can endanger their savings and property.

It is often believed that a revocable trust automatically protects your assets during your lifetime. This is false. Recovable trusts they don't offer much protection during life, if any. This is especially crucial for "normal" people that may need long term care in the future. Assets held by revocable trusts are considered "countable" for Medicaid purposes and may prevent eligibility for important health care benefits.

Irrevocable Trusts: What Are They?

An irrevocable trust is a legal agreement where the grantor (the person creating the trust) transfers property or assets to a trustee to be held on behalf of the beneficiaries. Unlike a revocable trust, once set up, there are limitations to the terms of an irrevocable trust which cannot be changed or revoked.

The grantor gives up ownership and control over certain aspects of the trust, but also gains significant tax and creditor protection benefits.

When Should I Have An Irrevocable Trust?

Irrevocable trusts can be a great tool for asset protection and estate planning, but they are not right for everyone. Generally, irrevocable trusts are recommended for individuals with high net worth, complex financial situations, and specific financial and estate planning goals.

Long Term Care Needs Are Particularly Important When It Comes To Trust Planning

For example, if you want to protect your assets from future long-term care costs, an irrevocable Medicaid trust may be a good option. Or, if you have a family business you want to pass on to future generations, a grantor-retained annuity trust can allow for a tax-efficient transfer of ownership.

What Are The Different Types Of Irrevocable Trusts?

There are several types of irrevocable trusts, each serving a different purpose. One common type is the irrevocable life insurance trust, designed to keep life insurance benefits outside of the deceased person’s estate and avoid estate taxes.

Another popular option is the charitable remainder trust, which allows the grantor to make a charitable donation while retaining an income stream from the assets contributed to the trust. Additionally, the irrevocable spendthrift trust can protect the assets from the beneficiaries’ creditors or bad financial decisions.

1. Life Insurance Trusts/Irrevocable Life Insurance Trust (ILIT):

Life insurance trusts are created specifically to hold life insurance policies. The trustee of the trust is responsible for owning and managing the policy. The beneficiaries are designated by the grantor when they establish the trust. This type of irrevocable trust ensures that the life insurance proceeds are not included in the policyholder's estate. It helps to reduce estate taxes and ensures that the insurance proceeds are available to the beneficiaries as soon as possible.

2. Charitable Trusts:

Charitable trusts allow you to donate assets to your chosen charity while receiving benefits. The trust can be set up so you receive a tax deduction, and the charity receives a regular income stream. There are different types of charitable trusts, including Charitable Remainder Trusts and Charitable Lead Trusts, each with its unique benefits.

3. Medicaid Planning Trusts:

A Medicaid planning trust allows you to protect your assets from being used to pay for long-term care. With the cost of long-term care rising, protecting your assets from these significant expenses is essential. The trust is irrevocable, which means the assets in the trust are protected. However, creating a Medicaid planning trust requires careful planning and legal advice.

4. Asset Protection Trusts:

If you're worried about creditors or lawsuits, an asset protection trust is a legal way to protect your assets. This type of trust is set up to protect your assets from creditors or potential lawsuits while still allowing you to benefit from them.

Learn more about Medicaid asset protection trust. 

5. Generation-Skipping Trusts - Avoiding Estate Taxes:

Generation-skipping trusts are created to pass wealth onto future generations while avoiding estate taxes. The trust is established for the benefit of grandchildren or great-grandchildren, keeping wealth in your family while minimizing the tax liability.

6. Grantor Retained Annuity Trust (GRAT):

A GRAT allows you to gift property to an irrevocable trust while retaining the right to receive an annuity payment for a set period. When the time is up, the trust assets transfer to your heirs or beneficiaries.

7. Qualified Personal Residence Trust (QPRT):

A QPRT allows you to transfer ownership of your home or vacation property to an irrevocable trust wherein you can still live for some time before it transfers ownership to the beneficiaries. It helps to reduce your estate tax burden when you pass away.

Revocable And Irrevocable Trust: Which Is Right For YOU?

In conclusion, understanding the differences between revocable and irrevocable trusts is vital for anyone looking to create an estate plan.Choosing between a revocable trust and an irrevocable trust can be quite a challenge. Both trusts come with unique advantages and disadvantages; the key is determining which trust structure is better suited to your specific goals.

It is crucial to weigh the benefits and limitations of each option before making a choice. When making your decision, you should consider your circumstances and work with your attorney or estate planner. Your estate planner can help you create a best plan for your specific needs. Estate planning can be tricky, and seeking professional advice before making any decisions is essential. So, make the right choice and secure a better future for your loved ones today!

Contact us today for a consultation: (248)278-1511

If you're interested in setting up an irrevocable trust for your estate planning needs, our experienced legal team at the Family & Aging Law Center can help you with every step of the process. We'll ensure that your assets go where you want them to go and that your beneficiaries are properly cared for.