Many people today understand the importance of estate planning and know that trusts can play a key role when it comes to passing down assets and minimizing the damage of the estate tax; however, there are many different types of trusts that people can use.
Two of these trusts are revocable and irrevocable trusts. Because they're common, many people wonder when to use one trust versus the other. Understanding the differences between the two trusts will help people decide when to use which type of trust.
Do You Want the Ability to Modify the Trust Agreement?
Many people have written a will designating who receives what assets when the owner dies. Sometimes, this will is written early in life and may need to be amended as events play out. The same issue holds true for trusts. If someone sets up an irrevocable trust, this agreement is typically unable to be modified, changed, or revoked even with a legal order.
This is why it is called an irrevocable trust. If someone sets up a revocable trust, the asset distribution can be changed if the grantor decides to do so. Changing the distribution of an irrevocable trust is a complicated manner. If there is any chance the agreement will need to be modified, it may be better to use a revocable trust.
Do You Want to Remain the Owner of the Assets?
Some people would like to remain the owner of their assets even after the trust has been created. In this situation, it would be better to set up a revocable trust. If someone sets up an irrevocable trust, they forfeit ownership of their assets. Of course, this doesn't mean that someone gets kicked out of their house; however, it does mean that the assets aren't included when the estate tax is calculated. Someone who wants to lessen the hit from the estate tax would generally want to set up an irrevocable trust even though this means that they would no longer be the legal owner.
Do You Want Protection from Claimants?
When someone sets up an irrevocable trust, they lose ownership of the assets that have been placed in the trust. This means that creditors and debt collectors cannot seize the assets in the trust because they no longer own that property. Even if someone goes through a divorce or owes medical debts, those items cannot be seized. This is an important shield for assets, especially as someone gets older. Use this trust to protect the inheritance of the beneficiaries.
It is important that people remember that these are only two of the many types of trusts at someone's disposal when it comes to estate planning. To ensure that these legal tools are used correctly, please consider hiring an experienced estate planning attorney to maximize potential benefits for your heirs.