When planning your estate, you may encounter the terms revocable and irrevocable trust. Each one serves a unique purpose and offers distinct advantages. It is essential to understand the critical differences between these trust types. Doing so could enable you to make an informed decision about which one best suits your needs.
What is a revocable trust?
A revocable or living trust allows you to control your assets during your lifetime.
Key features of this trust include:
Flexibility
As your situation changes, you could add or remove assets, change beneficiaries, and alter the terms of the trust.
Control
You could retain complete control over the assets in the trust and can function as the trustee.
Privacy
Upon your death, assets in a revocable trust could bypass probate, keeping your affairs private.
Limited asset protection
While you are alive, the court will consider assets in a revocable trust part of your estate and may be subject to creditors’ claims.
As the name suggests, you can modify, amend, or even dissolve a revocable trust anytime.
What is an irrevocable trust?
Once set in place, you may be unable to modify or revoke an irrevocable trust easily. When you transfer assets into this type of trust, you relinquish control over them. While this may seem disadvantageous, irrevocable trusts could offer unique benefits in estate planning, including:
Asset protection
Assets in an irrevocable trust are generally safe from creditors and legal judgments.
Tax benefits
Adequately structured irrevocable trusts could help reduce estate taxes and income taxes.
Medicaid planning
You could use these trusts to protect assets while qualifying for Medicaid benefits.
Charitable giving
Certain types of irrevocable trusts could facilitate charitable donations while providing tax benefits.
Which one is the right trust for you?
Your choice between a revocable and irrevocable trust depends on your specific goals, financial situation and long-term plans. A revocable trust might be more suitable if you value flexibility and want to regulate your assets. However, if you want to protect your assets, an irrevocable trust could be the better option.
Trusts are complex legal instruments, and their implications can be extensive. Consider consulting an attorney to determine which type of trust aligns best with your unique circumstances and objectives.