Creating an estate plan involves thinking about the best way to pass assets down to your beneficiaries. While some can be transferred through your will, others are best handled through trusts.
Two primary types of trusts are revocable and irrevocable. Each of these serves a different purpose and offers different benefits and limitations. Understanding the differences between these trusts is essential if you’re considering using trusts to address certain assets in your estate plan.
Revocable trusts
Revocable trusts, also known as living trusts, are characterized by your ability to alter, amend or revoke the trust at any time during your lifetime. This flexibility allows you to maintain control over the assets placed within the trust. Upon your death, the trust typically becomes irrevocable, which means no further changes can be made.
The main advantages of a revocable trust include avoiding probate. When assets are transferred through probate, there’s a public record of the matter. Trusts maintain privacy since the terms aren’t part of public record.
One limitation to revocable trusts is that they don’t provide any protection from creditors. Since the assets are still in your control, creditors can stake a claim to the assets held in the trust.
Irrevocable trusts
Irrevocable trusts can’t be altered or revoked once they have been established. This means that you completely relinquish control over the assets and the terms of the trust. This removes the assets from your taxable estate, which can lead to significant tax benefits.
One key advantage of an irrevocable trust is asset protection. Since the assets no longer belong to you, they are generally protected from creditors and legal judgments against you. Irrevocable trusts are often used to protect assets for the benefit of the beneficiaries by ensuring that the assets are managed and distributed according to your wishes.
Establishing trusts is only one part of a comprehensive estate plan. Working with a legal representative who can assist you with getting things set so they accurately represent your wishes can help to ensure that your estate plan does what you need it to do when the time comes.