A trust is an independent legal article an individual creates to manage his or her assets. It is set up during the individual’s lifetime so that the assets can be used in accordance with the specific requirements and demands of the person. Once the trust is developed with all the assets enclosed, a trustee, which is essentially a third party, manages them.
The trustee is responsible for the distribution of the assets in case the owner dies. But a trustee can only manage the trust within the bounds of the set guidelines of the trust. Wealthy people often set up trust instead of using a will for estate planning and for specifying how their wealth is to be spent after they are gone.
Irrevocable vs Revocable Living Trust
- Revocable Trust/Living Trust
A living trust and revocable trust are two different terms that describe the same thing: a trust in which changes can be made at any point. An irrevocable trust, on the other hand, is a trust that is not subjected to modification once it has been set up without the permission of the beneficiaries.
The terms of a revocable living trust can be modified or altered at any time by the owner. They are at liberty to remove a certain beneficiary, designate a new one, and change stipulations regarding the management of assets within the trust. Revocable trusts have a few downsides.
As the owner has all the control over the trust, the assets placed into it are not protected from the creditors in a way they are in the case of an irrevocable trust. If the person is sued, the assets might be ordered to be liquefied according to the judgment put forth. When the owner dies, the trust assets are subject to state and federal state taxes.
- Irrevocable Trust
In an irrevocable trust, all the terms are set in stone the moment the agreement is signed. With the exception of incredibly rare situations, no modifications are made in an irrevocable trust. As the benefactor puts all the assets within the trust, all ownership rights are revoked. It is a major factor to consider when you are deciding on which trust to use: irrevocable vs revocable living trust.
One of the major reasons to opt for an irrevocable trust system is the taxes. As the irrevocable trust removes the assets from the taxable state of a benefactor, they are not subjected to estate tax when deceased, and also, they rid the benefactor of any tax responsibility for the income generated through their assets. An irrevocable trust can be complicated to set up, and you would probably need the assistance of a professional attorney in the matter.
Which One Do I Choose?
The asset protection advantage of irrevocable trusts stems from the detachment of the benefactor from his or her assets. Paradoxically, it is the giving up of the ownership of their assets that enables them to protect them better. A well-established irrevocable trust offers many benefits. It shields the assets from estate taxes and creditor claims.
A revocable trust enables the benefactor to retain a considerable amount of control over their assets. It is a practical way to avoid a validation battle. It also makes sure that the assets are transferred over to the successor trustee smoothly in the case that a benefactor becomes incapable of managing the trust. On the downside, a revocable trust does not possess solid asset protection characteristics. The assets can be captured if the benefactor is sued and the trust remains a part of the estate.
The kind of trust you need to set up depends greatly on your present life circumstances as well as your future financial objectives. Regardless of the type of trust you choose, trust is an incredibly flexible and useful tool. It needs due consideration if you want a trust that protects your assets and assists you in establishing an estate planning policy.
