Trusts can either be revocable or irrevocable. Understanding the differences is crucial if you are considering creating a trust for your loved ones to benefit from when you are gone. Choosing the wrong option can lead to undesirable consequences and legal issues in the future.
One of the key differences is the level of control you have over the trust. For revocable trusts, you remain in charge of everything. You can alter, change or even terminate the trust without consulting anyone since you still own the trust assets.
With an irrevocable trust, you do not retain much control over your assets and the trust once it is created. You cannot change the terms of the trust or revoke it as you wish once it is established as you no longer legally own the assets in the trust. Below are other key differences between revocable and irrevocable trusts.
Asset protection capabilities
An irrevocable trust provides greater asset protection compared to a revocable trust. For instance, creditors can recover the assets held in a revocable trust to settle debts since you still retain legal ownership of these assets. On the other hand, an irrevocable trust legally owns the assets it holds, shielding them from such third-party claims.
Tax consequences
Assets in a revocable trust are still considered part of your estate and subject to estate taxes. However, the same does not apply to irrevocable trusts since you are not considered the legally recognized owner of its assets.
Learning more about how trusts work before kick starting the process and seeking the necessary guidance can help you make the right decision that aligns with your goals. It can also help you avoid costly mistakes that could derail your estate plan.