As you begin work on your estate plan, there are a variety of estate planning tools to consider using. One of those tools is a living trust, which is a type of trust you make during your lifetime to help manage your assets while you are alive and distribute your assets after your death.
Living trusts can be further divided into either revocable or irrevocable living trusts. However, people are often confused about the difference between the two. It can be helpful to understand the differences between revocable and irrevocable living trusts to make sure you choose the best type of trust for your situation and goals.
Revocable living trust
One of the defining features of a revocable living trust is that you can change or revoke the trust at any time. Often, when someone creates a revocable living trust, that person will transfer ownership of his or her assets to the trust, name himself or herself as the trustee and manage the assets in much the same way he or she did before there was a trust.
If the person who created the trust becomes sick, a successor trustee can manage the property in the trust. If the person who created the trust dies, the trust becomes irrevocable, and the successor trustee will disperse the assets according to the wishes of the deceased.
Irrevocable living trust
Not all irrevocable trusts start off as revocable trusts. Sometimes, an irrevocable trust is a more appropriate option for someone’s situation.
Unlike a revocable living trust, an irrevocable living trust cannot be changed once it is created. Also, the person who creates the trust often cannot serve as the trustee. These differences may seem risky, but they can provide several benefits.
Some of the benefits of irrevocable trusts include:
- Assets in the trust are protected from creditors
- Assets in the trust are protected from being taken in a lawsuit
- Assets in the trust are not taxed as part of your estate
- Assets in the trust cannot disqualify you for certain government benefits
Each person’s situation and estate planning goals are different. To adequately reflect this, it can be important to fully understand all of the estate planning tools available to you, so you can make use of the best tools for your situation.