Trusts are an excellent estate planning tool. People like them for the tax benefits and avoiding probate.
Trusts offer flexibility and allow you to determine the conditions under which your assets will be distributed. The two main types are revocable and irrevocable, and it’s crucial to understand their differences.
Irrevocable trusts offer greater asset protection
Trusts allow the grantor (the person creating the trust) to transfer all of their assets to a neutral party (trustee) to be managed for the benefit of a third party (beneficiary). A revocable trust offers greater flexibility, as the grantor can modify, amend or revoke the trust at any time. It also helps avoid probate, keeping details of the estate private.
However, since the grantor retains control over the assets, any income earned from the trust must be claimed on their taxes. Additionally, assets are not protected from creditors.
On the other hand, once assets are transferred into an irrevocable trust, the grantor relinquishes all control over those assets. Since the grantor no longer owns them, they are protected from creditors and legal judgments. They also can provide considerable tax savings.
But, once an irrevocable trust is established, the terms can’t be changed or revoked without the consent of the beneficiaries. Depending on what is at stake, attempting to change the terms of an irrevocable trust can put the grantor, trustee and beneficiaries in the middle of a long and expensive court battle.
The permanence of establishing an irrevocable trust requires thorough consideration and planning, such as structuring it to address future needs or potential changes in circumstances. Working with someone who can help you meet your objectives, ensure regulatory compliance, anticipate potential issues and incorporate provisions to address them is vital.