A trust is an arrangement that enables one party (a trustor) to allow another party (a trustee) to hold assets for the benefit of a third party, the beneficiary. Lawyers who deal with wills and trusts often advise clients to use trusts as a way to allow assets to avoid probate, lessen tax burdens for beneficiaries or take care of loved ones with special needs. Different types of trusts are used for different purposes—it is important to understand each type and their benefits and drawbacks.
A revocable trust allows the trustor to take assets in and out of the trust, change its terms and beneficiaries or terminate it at any time. When a trustor dies, the property in the trust is distributed to beneficiaries according to the terms of the trust agreement. The major advantage of a revocable trust is that the trustor has the flexibility to modify or terminate the trust while they are alive. A revocable trust can also ensure that your assets remain available to be used for your benefit should you become incapacitated or unable to manage your affairs.
Typically, the assets in a revocable trust do not have to pass through probate, but are subject to creditors and estate and inheritance taxes. Probate is the legal process required to validate a will and distribute an estate. It can be a costly and time-consuming process. Having the majority of your assets in a revocable trust can help your loved ones save the cost and hassle of dealing with probate. Having an attorney explain the probate process and going over the pros and cons of irrevocable trusts can help you make informed decisions that can benefit you and your loved ones.
Except in very rare circumstances, the terms of an irrevocable trust cannot be changed once it is set up. The trustor is no longer the owner of the assets placed in the trust–they cannot take them out, modify the terms of the trust, or terminate it. Property, securities and other assets placed into the trust during the trustor’s lifetime must be registered in the name of the trust. Although irrevocable trusts do not provide as much flexibility as revocable trusts do, they sometimes offer more tax savings. Because the trustor no longer has ownership of the property in the trust, these assets, in many cases, are not subject to income taxes or estate/inheritance taxes.
With this type of trust, assets are more protected from creditors and taxes unless fraud is involved. For estate planning purposes, an irrevocable trust may be set up to hold monies for funeral costs or special types of life insurance payouts as well.
Which Type of Trust is Right for You?
There is no one-size-fits-all solution in estate planning. Revocable and irrevocable trusts can be powerful tools that can protect your interests when used correctly. An estate planning attorney can assess your circumstances, talk with you about your wishes and goals and devise a plan that works for you and your family.