Trusts are a powerful tool when estate planning, offering a variety of benefits, such as providing for family members, reducing estate taxes and avoiding probate. A trust is a legal arrangement wherein a person or institution holds assets for the benefit of named beneficiaries. The two main types of trusts are revocable and irrevocable.
Understanding these types of trusts can be critical for effective estate planning. Everyone should understand revocable and irrevocable trusts’ key characteristics, benefits and drawbacks before committing to a particular opportunity.
Revocable trusts: Flexibility and control
Revocable trusts, also known as living trusts, are established during the lifetime of the person who creates the trust, known as the settlor. The primary advantage of a revocable trust is that it can be changed, modified or entirely revoked at any time by the settlor. This flexibility allows for adjustments in response to life changes, preferences or shifts in financial circumstances.
While revocable trusts offer control and flexibility, there are also drawbacks that must be considered. Since the settlor retains control over the assets, those assets remain within the settlor’s estate for tax purposes and can be subject to creditors’ claims.
Irrevocable trusts: A trade-off for greater protections
On the other hand, irrevocable trusts, once established, generally cannot be altered, amended or revoked by the settlor. An exception may occur if all the beneficiaries agree to the proposed changes or if a court orders changes. The lack of control is a trade-off for certain protections and benefits.
By placing assets in an irrevocable trust, those assets are typically removed from the settlor’s taxable estate, potentially resulting in significant estate tax savings. In addition, assets in an irrevocable trust are usually protected from creditors’ claims, making this a valuable tool for asset protection.
The question of whether a revocable or irrevocable trust will better suit your needs depends on various factors, including your financial situation, your goals for estate planning and your need for control.