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What are irrevocable and revocable trusts?

On Behalf of | Jan 18, 2024 | Estate Planning |

Trusts are critical instruments in estate planning that serve distinct purposes and offer different benefits. Understanding the two primary types of trusts is crucial for effective estate management and ensuring that assets are distributed according to one’s wishes.

The two main categories of trusts are revocable and irrevocable. While they both enable individuals to pass assets to their loved ones while bypassing probate, these categories of trusts are distinct in significant ways.

Revocable trusts

Revocable trusts, also known as living trusts, offer flexibility and control fr the individual creating the trust, known as the creator. They allow the creator to retain control over the assets during their lifetime. Revocable trusts are favored for the flexibility and the control they offer. They enable the creator to change beneficiaries, stipulations or even revoke the trust entirely. This adaptability makes them suitable for individuals whose circumstances may change, such as those with young families or evolving financial situations.

Additionally, revocable trusts can provide privacy and avoid probate, ensuring a smoother and more private transfer of assets. Upon the creator’s death, a revocable trust typically becomes irrevocable, ensuring the assets are distributed according to the established terms.

Irrevocable trusts

An irrevocable trust, once created, generally can’t be altered or terminated by the creator. This type of trust involves permanently transferring assets, effectively removing them from the creator’s estate. This rigidity is a notable drawback for individuals whose circumstances may change or who desire more control over their assets.

The primary advantage of an irrevocable trust is its ability to offer tax benefits and protect assets from creditors and legal judgments. Transferring assets out of the creator’s estate reduces estate taxes and can provide significant protection for its beneficiaries. By reducing the creator’s assets, it can also help them to qualify for government benefits.

Including trusts in an estate plan enables a creator to manage the estate better. Working with someone familiar with their wishes can enable them to learn which specific trusts may make it easier to set everything up in enforceable ways.