A trust is a powerful estate planning tool if you are interested in safeguarding your future and loved ones. Done right, a trust can save time, reduce unnecessary paperwork and ensure that your assets pass down to your intended beneficiaries.
However, not all trusts are created equal. If you are just getting started with your estate planning process, you might be wondering how to pick the right trust for your needs. Revocable and irrevocable trusts are two common types that can help you protect your assets, but they have important distinctions.
A revocable living trust
If you are looking to have a greater sense of control over your assets, then you need to consider setting up a revocable living trust. Basically, a revocable living trust allows you to accomplish the following:
- Add and/or remove assets and beneficiaries
- Modify the trust instrument
- Sell off some trust assets
- Avoid probate
As the name suggests, this trust becomes revocable when you die. However, while it can help you avoid probate, a revocable living trust does tax protection.
Irrevocable living trust
An irrevocable trust shares several similarities with a revocable trust. However, one of the distinct differences between these trusts is that you cannot cancel or change an irrevocable trust once it is established.
In establishing an irrevocable trust, you will be transferring the ownership of the trust assets to the trust, for management by the trustee. Some of the powers you will lose when you establish an irrevocable trust include:
- The ability to change your listed beneficiaries
- The ability to change the trust instrument
- The ability to take over and sell the assets in the trust
An irrevocable trust is ideal when you are looking for an extra layer of protection for your assets. It can also be handy when you are looking to minimize estate taxes. Knowing how these two types of trusts work, as well as their limitations, can help you choose the right option for your needs.