Estate planning ensures your assets are distributed according to your wishes after you’re gone. While many people are familiar with wills, trusts offer another avenue for estate planning. They can provide more control over your assets, offer greater privacy and may offer tax benefits.
A trust is a legal entity that holds and distributes assets according to the terms set by you, the trust creator. However, not all trusts are the same. They can be categorized into two main types: revocable and irrevocable. Understanding the benefits of each can help you make an informed decision about your estate plan.
Revocable trusts offer flexibility
A revocable trust, also known as a living trust, can be altered, changed or revoked entirely by you during your lifetime. This lets you modify the trust terms as your circumstances or wishes change. One of the main advantages is that assets in a revocable trust avoid probate, which is the legal process to authenticate a will.
Irrevocable trusts provide asset protection
Once you’ve placed assets into an irrevocable trust, you generally can’t modify or withdraw them without the beneficiary’s permission. Though this might seem like a drawback, it’s a powerful tool for asset protection. Assets in an irrevocable trust aren’t considered part of your estate for tax purposes, potentially reducing estate taxes. Additionally, because you no longer technically own the assets, they’re usually shielded from creditors and legal judgments.
It’s critical that your estate plan clearly outlines your wishes. Within each type of trust, certain trusts serve specific purposes. Working with someone familiar with trusts as part of a comprehensive estate plan can help you make a knowledgeable decision.