This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
$1 buys you full access to ALL of TheStreet's Subscription Services! Learn More

What's the Difference Between a Revocable and an Irrevocable Trust?

Last week's Fund Forum about setting up a trust obviously struck a nerve with our readers.

The column dealt mainly with setting up irrevocable trusts, leading reader Rey Barry to ask, "Why was there no mention of revocable family trusts?" So let's look at the differences between these two types of trusts.

The biggest distinction is that an irrevocable trust cannot be changed or revoked once you create it, as its name implies. A revocable trust can be changed as often as you like while you're still alive.

An irrevocable trust usually is created to remove assets and their future income and appreciation from your estate. Once you put assets into an irrevocable trust, you relinquish your rights to these assets. The good part is that they are now out of your estate. That means these assets will not be subject to estate tax, says Laura Peebles, director of estates, gifts and trusts at Deloitte & Touche in Washington. But by giving those assets to a trust, you may be liable for gift tax.

An irrevocable trust "protects your assets from ex-spouses or spendthrift grandchildren," says Peebles. In addition, your beneficiary's creditors can't touch assets in an irrevocable trust. It's a great vehicle for having your plans carried out without having to worry about your assets falling into the wrong hands.

A revocable trust also is called a living trust. The obvious difference is that you can amend, modify or cancel this trust at any time. It must be created while you are still alive because it becomes irrevocable after you're dead.

Putting the assets in a revocable trust does not get them out of your estate. You'll pay estate tax on these assets, but you won't pay gift tax. That means any income or appreciation generated from these assets flows back to you, so you will owe income tax on that money. So there are no real income or estate tax advantages to this, notes Peebles.

The big perk to a revocable trust -- as with most trusts -- is the privacy.

When you die, your will becomes public record. So your beneficiaries will know exactly what they're getting -- or, more importantly, what they're not getting -- from you and your estate. "If you're Celine Dion, you don't want the National Enquirer getting its hands on your will," notes Peebles. But you don't have to be a big star to want some privacy.

In a revocable trust, you control the flow of assets to whomever you want without the whole world knowing. Only your appointed trustee has to know your plans for your beneficiaries.

The other advantage is that the trust will help you avoid probate fees in some states. When you die, your will must go through probate, a special legal proceeding. Some states charge exorbitant fees for these proceedings. Transferring your assets to a revocable trust can cut those probate costs because the assets in the trust are not controlled by your will. "Just make sure that your will and the revocable trust are coordinated," reminds Peebles.

So think of a revocable trust as a private will that may allow you to escape some probate processing fees. "But these trusts are not 'one size fits all,'" says Peebles. "Not everybody needs one." In some instances, a will may be all you need. Note that a revocable trust can't take the place of a will because you can't name a guardian for kids, for one.

Another Index Option

Last week, we responded to reader Steve Underwood's question about finding an index fund that will let him invest $1,000 or less. Reader Nick Pile suggests that Steve consider a unit investment trust. "These have a minimum investment of $1,000, and they package usually 25 to 30 stocks and hold them for a set maturity," says Pile. True. These trusts are a fixed portfolio of securities with a finite life. They are like index funds with expiration dates. Many UITs closely mirror major indices. See a previous Fund Forum for more details.

Nasdaq 100 Names

"Where can I get a list of the 100 companies in the Nasdaq 100 index?" asks Gail Morgan.

The Nasdaq-Amex Web site has everything you'll need to know about the Nasdaq 100. For the complete list, see this section of the site.

Dagen Returns

If you have any more questions about trusts, send them to taxforum@thestreet.com , and we'll try to answer them in Saturday's Tax Forum.

Tuesday, Dagen McDowell, who launched the Fund Forum column as a daily feature, will be back as its primary writer. In honor of her return, we're renaming the column "Dear Dagen."

Elizabeth Roy will continue writing the Friday bond-focused column, which will be renamed the "Fixed-Income Forum."

So send your mutual fund questions to deardagen@thestreet.com , and send your bond and bond fund questions to fixed-incomeforum@thestreet.com . Don't forget to include your full name.

TSC Fund Forum aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,827.75 +12.81 0.07%
S&P 500 2,072.83 +5.80 0.28%
NASDAQ 4,787.3170 +29.0650 0.61%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs