Trusts can be a valuable asset protection and distribution tool. Trusts are utilized for various reasons, including tax and inheritance purposes as well as creditor protections. It is important to properly fund your trust with assets. Otherwise, your assets may not be protected or distributed in accordance with your wishes.
There are different types of trusts to choose from, depending on your financial goals. Understanding the different types of trusts is important. You may be able to avoid common mistakes and pick the trust that meets your needs.
What is an irrevocable trust?
As the name states, an irrevocable trust is binding and, once you sign the agreement, you cannot change the trust terms. By transferring your assets into this type of trust you give up your control and ownership over those assets. There are some benefits to giving up ownership rights of your assets, however.
What is a revocable trust?
A revocable trust gives you the option to amend, reinstate or revoke the trust agreement. Having this control over your assets comes with a few drawbacks unfortunately.
Which trust fits my needs?
Some differences and similarities between these two types of trusts are:
- Ownership and control: Revocable trusts allow you to keep the assets in the trust under your control as well as retaining your ownership rights. Transferring your assets into an irrevocable trust means that you are forfeiting your ownership rights and control of the assets.
- Asset protection: Revocable trusts do not protect the trust creator’s assets from creditors, ex-spouses or court judgments while the trustors are alive. However, once the beneficiary inherits the assets, they can leave their inheritance held in trust, ensuring they will benefit from protection. If the beneficiary removes the assets they lose all protection. An irrevocable trust protects assets from creditors, ex-spouses and any court judgments because the assets are in the name of the trust.
- Avoiding probate: Both of these trusts avoid probate as long they are both funded properly. With a properly funded trust, a probate proceeding may be avoided entirely.
Setting up a revocable or irrevocable trust requires legal counsel. If you need help understanding your options or if you have any other questions, speaking with an experienced elder law attorney may help.