A will is key part of estate planning. For many families, a trust can be just as important when building a comprehensive estate plan.
Trusts offer a number of estate planning benefits. They can give people more control over the distribution of their estate. Trusts can also help people avoid having their estate go through probate.
There are many different kinds of trusts. Among those different types, there are two primary categories that trusts can be divided into: revocable and irrevocable. There are different pros and cons to each that you should consider.
Revocable trusts are also sometimes referred to as “living trusts.” Revocable trusts can be changed after they’ve been created. These changes may include removing property from the trust or revoking the trust altogether.
Revocable trusts will accomplish the goal of keeping your estate out of probate. However, assets inside of a revocable trust aren’t protected from creditors. Those assets in a revocable trust may also be vulnerable if you are sued or wind up in debt.
Irrevocable trusts, on the other hand, can’t be altered after they’ve been established. In other words, you no longer have control over assets that have been placed in an irrevocable trust.
It’s reasonable to wonder why anyone would use an irrevocable trust if you have no ability to make changes to them. One reason is that they offer greater asset protection than revocable trusts.
Assets in an irrevocable trust are no longer legally owned by the grantor (the person who establishes the trust). Since the grantor no longer legally owns the assets in the irrevocable trust, they can’t be targeted by creditors or from a lawsuit.
Irrevocable trusts can also be advantageous for families that may have estate tax concerns. Assets in an irrevocable trust are removed from your taxable estate. If your estate is subject to estate taxes, irrevocable trusts can also help you limit how much in taxes your heirs will have to pay.
Depending on your goals, a trust can be an effective tool to include in your estate plan. Because of their legal complexities, it’s a good idea to consult with an experienced estate planning attorney to help you understand which type of trust is best for you and your loved ones.