There are many reasons to consider creating a trust-based estate plan. If you think this might be right for you, it is important to understand the different types of trusts you can choose from.
A living trust is one of the most popular trusts to include in an estate plan. It is created when you are alive, as opposed to a testamentary trust, which is formed upon your death.
Living trusts can be either revocable or irrevocable, and the main difference between the two may seem obvious. A revocable trust can be revoked, while an irrevocable trust cannot. However, the ability to revoke a living trust is only one of several differences.
What to know about revocable living trusts
Revocable living trusts allow you to cancel the trust at any time, but they also allow you to modify the trust at any time. One modification option that is convenient to have involves the ability to take property out of the trust if you change your mind. You can also change the terms of the trust or the beneficiaries. Life is seldom predictable, but the flexibility of this trust can help you adapt to any life changes that may occur.
Another important feature of revocable living trusts is your ability to name yourself as the trustee. This means that you can manage the assets you put in the trust. If you choose to do this, you might notice very few changes from the time you managed your assets outside of the trust.
However, these benefits are also drawbacks. Because you can control the assets yourself, the assets are still legally considered your personal property. This means that they are part of your estate and vulnerable to estate taxes, creditors and lawsuits. The assets in the trust can also factor into your eligibility for some income-based governmental programs.
How irrevocable living trusts are different
Irrevocable living trusts are much less flexible. The assets that you transfer to the trust become owned by the trust, and only rare circumstances allow you to alter the terms of the trust. You most likely will not be able to make changes or take items out of the trust.
You also cannot manage the trust yourself. Instead, you must select someone to act as the trustee. This person will manage the assets in the trust on behalf of your beneficiaries.
These rules may feel limiting, but they serve a purpose. Your lack of control over the assets in the trust help protect them. The assets in an irrevocable living trust are not considered part of your estate, so they cannot be taxed as part of your estate. They also cannot be taken by creditors or by legal actions against you. The assets also cannot disqualify you for income-based government programs.
Both types of living trust can help avoid probate, plan for incapacity and detail how you want your assets distributed. However, there are several significant differences between the two types. These differences involve both pros and cons, so the best option will depend entirely on your unique situation and your estate planning goals.