Trusts are a critical part of an estate planning strategy, providing various benefits that suit different needs. Revocable and irrevocable trusts, the two main types, each offer distinct advantages and limitations.
Revocable trusts, also known as living trusts, provide flexibility and control, making them a popular choice for many individuals. While less flexible, irrevocable trusts provide a higher degree of asset protection and can offer significant tax advantages.
Advantages and disadvantages of revocable trusts
A revocable trust’s defining feature is its level of control. As the trustee of it during your life, you can modify or terminate the trust’s terms at your discretion. This flexibility extends to the distribution of assets, allowing you to make alterations to the assets included in it as your circumstances change.
Probate can be time consuming and public, but assets within a revocable trust bypass this process, facilitating a quicker, more private transfer upon death. Your designated successor trustee can manage your assets if you become incapacitated, which eliminates the need for a court-appointed guardian.
Your assets in the revocable trust are at risk of being claimed by creditors because these assets are considered part of your estate. They are included in your taxable estate upon death, so the estate may have tax liabilities.
Pros and cons of irrevocable trusts
Irrevocable trusts can’t be easily changed or terminated once established. One primary advantage of them is that the assets within an irrevocable trust are generally safe from creditors, providing a robust layer of asset protection.
Estate tax reduction is another attractive feature of irrevocable trusts. The assets within the trust aren’t considered part of your estate for tax purposes, potentially lowering the estate tax liability.
There are various types of trusts under each of these two types. Ensuring that you understand what might work for your estate plan is crucial so you can make the decisions you feel are best.
