You’ve worked hard your entire life and built a substantial amount of wealth. You probably own a business and a home among other assets. This means you should figure out what will happen to them when you pass on. And one of the most popular estate planning tools you can use for this is a trust.
Basically, a trust is a legal document that allows you to manage and distribute your assets both during your lifetime as well as after your passing. When you decide to create a trust, however, you will need to choose between a revocable and an irrevocable trust. Both types of trust have their pros and cons, which is why you need to take time to understand the right type for your estate planning needs.
Understanding revocable trusts
As the name suggests, you can amend or change a revocable trust at any time during your lifetime as long as you have the testamentary capacity to do so. This makes a revocable trust quite flexible. For instance, you can add or remove assets from the trust, change beneficiaries and even sell trust property.
A revocable trust can be ideal under the following circumstances:
- When you want to transfer your estate to heirs in private without going through probate
- If you own property across states and want to avoid ancillary probate in states other than where you reside in.
- When the value of your estate is less than the federal estate exemption
Understanding irrevocable trusts
An irrevocable trust, on the other hand, cannot be changed or modified without engaging the beneficiaries or a court order. Unlike a revocable trust, an irrevocable trust is not as flexible. However, it can protect your estate from certain taxes as well as creditors.
An irrevocable trust is ideal under the following circumstances:
- If you want to avoid estate taxes when your estate’s worth is higher than the federal estate tax exemption
- If you have no problem giving up control of your assets to the trust
- If you want to protect your estate from future creditors
A trust is one of the most commonly used estate planning tools. Find out how you can use a trust to safeguard your legacy and loved ones.