Now that you’re considering creating a trust, you may have heard about two of the most popular types of trusts, revocable and irrevocable. But do you know the difference between the two?
To start — a trust is a separate legal entity a person sets up to manage assets. Once assets are placed inside a trust, a third party — known as a trustee, manages them… and the trustee determines how the assets are invested and to whom they are distributed to when the owner of the trust — known as the grantor, passes away.
Rebecca Doane of “Doane and Doane” speaks about the difference between the two types of trusts.
“A revocable trust can be changed at any time and an irrevocable trust cannot be modified after it is created without the consent of the beneficiaries. It’s common to use a trust as opposed to a will for estate planning to stipulate what happens to your wealth upon death. A trust is also a great way to reduce tax burdens and avoid probate after the grantor passes away.”
With a revocable trust, you have flexibility. You can remove beneficiaries, designate new beneficiaries and modify stipulations as to how assets within the trust are managed. However, the disadvantage is that the assets contained within are not shielded from creditors the way they are in an irrevocable trust. The trust’s assets can be liquidated to satisfy any judgement against the estate. The assets held in trust are also subject to both state and federal estate taxes.
With an irrevocable trust, the terms are locked in when the agreement is signed. Changes are not often made to an irrevocable trust. Irrevocable trusts remove the assets from the benefactor’s taxable estate, as well as taxes placed on any income generated by the assets.
If you have questions about which type of trust will work best for you and your family, the advice and guidance of a qualified estate planning attorney will prove to be invaluable.
For more information, call Doane and Doane or visit doaneanddoane.com.