You have probably heard of a trust before, but did you know there are two kinds of trust? Many people are unclear on the function of each type of trust, making estate planning confusing.
Do not worry if this sounds like your situation. Here are some similarities and differences between revocable and irrevocable trusts.
What is a revocable trust?
A revocable trust is also known as a living trust because it allows you to remain in control of your assets during your life. If you become incapacitated or pass away, the assets in a revocable trust transfer to your designated trustee, avoiding probate. However, because a revocable trust remains in your possession, you will not receive tax benefits or protection from creditors.
What is an irrevocable trust?
An irrevocable trust is an estate planning vehicle that transfers select assets to a trustee. Once you place assets in an irrevocable trust, they no longer legally belong to you, and you cannot make changes. Because an irrevocable trust is in someone else’s name, it provides you with some tax benefits, protects the wealth within it from creditors and allows your heirs to avoid probate. Like a revocable trust, an irrevocable trust also takes effect if you become incapacitated.
Revocable and irrevocable trusts share some similarities and vary in a couple of ways, but both forms can serve a purpose in your estate plan. Regardless of what kind of trusts you have, you must fund them after creation for them to accomplish your goals.