When planning your estate, you might encounter two types of trusts: revocable and irrevocable. But what is the difference, and how do you know which suits your needs?
Understanding revocable trusts
A revocable trust, also known as a living trust, offers flexibility and control. As the name suggests, you can modify or dissolve this trust during your lifetime. Potential advantages of this type of trust may include:
- Flexibility: You may change beneficiaries, alter asset distribution, or terminate the trust entirely.
- Privacy: Unlike wills, revocable trusts typically do not go through probate. This allows you to keep your affairs private.
- Control: You maintain control over your assets while alive and function as the trustee.
However, it is worth noting that revocable trusts may not offer protection from creditors or estate taxes. Your assets remain part of your estate, potentially subject to these claims.
Exploring irrevocable trusts
On the other hand, an irrevocable trust is more rigid but can offer significant benefits in certain situations. Once established, you cannot modify or revoke this trust without the beneficiaries’ consent. Consider these potential advantages:
- Asset protection: You could shield assets in an irrevocable trust from creditors and legal judgments.
- Estate tax reduction: By removing assets from your estate, you might reduce your estate tax liability.
- Medicaid planning: In some cases, an irrevocable trust could help protect assets while qualifying for Medicaid.
The trade-off is that you relinquish control over the assets in an irrevocable trust.
Choosing the right trust
Your choice between a revocable and irrevocable trust depends on your specific circumstances, goals and financial situation. If maintaining control over your assets is crucial, a revocable trust might be more appropriate. If asset protection or estate tax reduction is your primary concern, an irrevocable trust could be worth considering.
Trusts are complex legal instruments with significant implications. Before making any decisions, consider seeking legal advice. An attorney could help you determine the best strategy for your unique situation.
