Amy Chain: Alisa, I’d love to stick with you for a second. We have a live question that came in on some phrases that you used earlier. Can we talk a little bit more about revocable versus irrevocable trusts and the tax implications of one or the other?

Alisa Shin: Okay. A revocable trust does no tax planning on its base. A revocable trust, really, the easiest way to think about it, it’s somebody’s alter ego. It typically uses your social security number. The difference is, is that if you title active into your revocable trust name, instead of it being Jane Smith, it’s going to be the revocable trust of Jane Smith, something like that.

Inside your revocable trust we’ll be doing your estate tax planning that comes into effect at your death. But if you have a revocable trust at your death, whatever assets are in that trust will be subject to estate or inheritance tax at your death.

An irrevocable trust, as a general rule, is not subject to your estate tax if you’re the one who put the money into the trust. There are many different kinds of irrevocable trusts that get created for different reasons. I would say primarily it’s done to do some tax planning, but that’s not always the case, so it is possible, especially when you have generational trusts, at some point a beneficiary of an irrevocable trust could be subject to estate tax or generation skipping tax. So that’s really where talking to your advisors become very important to understand what the tax implications are of various trusts that you might be beneficiary of. So it’s not just focusing on your assets, but assets that you have an interest in and trusts that you have interest in. So make that sure that you let your attorneys know that.

Beth Orford: And isn’t it true, just to add on, Alisa, that once you do transfer assets into that irrevocable trust, they’re by and large out of your control, that’s why you get the tax advantage.

Alisa Shin: That’s exactly right. I mean, there’s ways to build in some flexibility but you’re the one, technically, to be able to make it effective for tax purposes, you have to give dominion and control of the assets.

The tax implications of revocable and irrevocable trusts

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

© 2015 The Vanguard Group, Inc. All rights reserved. TE4PLTR 012015

Meet the speakers

Amy ChainModerator

Alisa ShinVanguard Asset Management Services

Beth OrfordVanguard Flagship Services