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Revocable vs. Irrevocable trust: Which trust should you set up?

On Behalf of | Nov 21, 2022 | Business Law

Alongside deciding how your assets will be distributed when you die, one of the most critical decisions in your estate plan is choosing the right trust – if you decide to set one up. The choice of a trust can mean the difference between a hassle-free and efficient succession and one characterized by loads of challenges.

There are generally two main types of trusts: revocable and irrevocable trust. Each trust comes with its merits and demerits. So how do you choose the right trust for your estate planning needs?

Understanding a revocable trust

A revocable trust gives you control over the trust upon set up. In other words, you reserve the right to modify or cancel the trust altogether.

A living trust comes with certain pros and cons. One of the pros is that the assets held in the trust will directly pass down to your beneficiaries upon your death without going through the long and costly probate. Also, the terms of the trust remain private upon your death, which is important if you are keen on protecting your loved ones’ privacies.

One of the major limitations of a revocable trust is that it considers you (the grantor) to be the owner of the trust’s assets. As such, you may not enjoy protection from creditor claims. Also, you will be responsible for making paying taxes on the trust’s investment returns.

Understanding irrevocable trusts

An irrevocable trust, as the name suggests, is non-modifiable. Once an irrevocable trust is set up, it can only be modified upon agreement with the trustee and the beneficiaries. Thus, upon its creation, you will be giving up its control to the trustee. The trust will report its own taxes and file separate returns.

The primary advantage of an irrevocable trust is that it protects you from creditors and estate taxes.

Choosing the right type of trust for your estate plan largely depends on the nature of your assets as well as your future needs. Find out how you can create a trust that will suit your estate planning needs.