The benefits of drafting a trust are many. Properly-funded trusts can help keep an individual’s estate out of probate, allowing assets to pass directly, quickly, and privately to their beneficiaries. Additionally, a trust allows an individual to control the circumstances of how and when their assets may be distributed, which is especially useful if, for example, one of your adult children struggles with substance abuse or gambling, or if you have a young child who should not receive their inheritance until they reach a certain age, or accomplish certain life milestones. Finally, trusts can help protect your assets against creditors and predators, and help you qualify for Medicaid should you need nursing home care in the future.
The way most trusts work is simple: after a trust is drafted, the grantor (the owner of the trust) transfers his or her assets into the trust, and appoints a trustee to manage and distribute those assets after the grantor passes away.
However, beyond the basics, the functionality of trusts becomes quite nuanced. There are several types of trusts, and each has pros and cons. The two most common types of trusts are revocable and irrevocable, but what exactly is an irrevocable trust? What is a revocable trust? Here’s what you need to know about these two types of trusts…
What is a Revocable Trust?
The chief distinguishing feature of a revocable trust is that the grantor can change its terms at any time. Unlike in an irrevocable trust, the grantor can update beneficiaries, or alter the terms of the trust whenever he or she wants.
Although this flexibility is a major advantage of a revocable trust, there are disadvantages, as well. The assets in a revocable trust are not protected from creditors, and the assets can be ordered liquified in the case of a lawsuit. In addition, the assets in a revocable trust are subject to estate taxes when the owner dies.
What is an Irrevocable Trust?
In an irrevocable trust, the terms cannot be easily changed once the agreement is signed. However, an irrevocable trust has significant advantages. For one, the assets in the trust are not subject to estate tax upon the owner’s death. The assets are also protected from creditors and other legal judgments, as they are owned by the trust and not the grantor and cannot be ordered liquified in the event of a lawsuit.
Revocable vs. Irrevocable Trust
It can be difficult to decide between a revocable and an irrevocable trust when creating an estate plan, and there are many considerations to keep in mind when choosing. Some other notable differences between the two types of trusts are that in a revocable trust a grantor can also be the trustee, but not in an irrevocable trust. In addition, in a revocable trust, the information in the trust is kept private, but in an irrevocable trust, details about the trust may be exposed during any legal proceedings that may arise.
Nonetheless, the protections offered by the irrevocable trust can make it a more desirable choice for many people. People working in professions where they could be subject to lawsuits, such as medical professionals and lawyers, may choose to protect their assets by setting up an irrevocable trust.
The best way to decide between these two options is to work with a legal expert who can help you determine which is right for you based on your wants and needs. At Barry Law, LLC, we have years of experience with all kinds of trusts. Contact us today to get started protecting your future!