Living trusts are effective estate planning tools that allow you to pass on your assets to beneficiaries, while also protecting the privacy of your estate as well as the privacy of your beneficiaries. They are not a matter of public record. Also, with a trust in place, you avoid the costly and time-consuming probate process that happens with a will.
In choosing to go this route rather than creating a will, you must decide whether to create a revocable trust or irrevocable trust. Each has advantages. However, key differences exist. But you must understand those differences when deciding to create a trust.
Change, no change
Among the important differences between a revocable and irrevocable trust include:
- Changing a revocable trust is possible at any time. Not so for an irrevocable trust. Only under rare circumstances can a trustee change an irrevocable trust.
- Assets in a revocable trust remain your personal property since you retain control over them. As a result, they do not receive protection from creditors who seek payment on outstanding bills. However, an irrevocable trust protects those assets from creditors since they no longer belong to you.
- Governments can seize assets from a revocable trust for state and federal estate taxes. This trust offers no protection from that happening An irrevocable trust has the advantage here. Since the assets no longer are yours and belong to the trustee and the trust’s beneficiaries, assets in an irrevocable trust are not subject to estate taxes.
- Assets in a revocable trust also are not protected from lawsuits. If a judgment is against you, those assets are at risk. However, assets in an irrevocable trust receive protection from court judgments.
Here is another key thing to remember about these trusts.
When the grantor of a revocable trust dies, the trust automatically transforms into an irrevocable trust. In such a situation, a successor trustee takes over by paying outstanding bills and settling the trust. The assets within an irrevocable trust can be held for indefinite periods prior to transferring to beneficiaries. That transfer of funds may even occur several years after the grantor’s death.