A revocable living trust (also known as a living trust) is a trust that the grantor creates during his or her lifetime. The trust provisions can be altered or revoked whenever the grantor wishes. A living trust is useful for managing assets during your lifetime, and protecting you should you become disabled or incapacitated. However, the living trust does not help you avoid estate taxes because the grantor’s power to revoke or amend causes the trust to be included as part of your estate. A living trust does help you avoid probate.
An irrevocable trust is a trust that cannot be amended or revoked (there are some rare exceptions to this rule). This begs the question of why one would use choose such a rigid and inflexible instrument. An irrevocable trust does have certain estate and tax benefits in specific circumstances. For example, an irrevocable trust can be useful if your profession is one that puts you at risk for lawsuits.
Revocable vs Irrevocable
Reasons to go with a revocable living trust:
- Protect your assets in the event of mental disability
Assets held in a living trust at the time of mental incapacitation can be managed by a disability trustee so a court doesn’t have to appoint its own guardian.
- To avoid the probate process
At time of death, assets held in a living trust will go directly to the beneficiaries named in the trust document.
- Maintain the privacy pf your trust property and beneficiaries
With a living trust, the trust document remains private and stays out of the public record.
Reasons to go with an irrevocable trust:
- Reduce your estate tax
An irrevocable trust will remove the value of the trust property from your estate so that it cannot be taxed after you die. By using an irrevocable trust, you are essentially relinquishing ownership of those assets and handing them over to the named beneficiaries.
- Protecting your assets
Similar to the way an irrevocable trust helps you avoid paying estate taxes, it also protects the trust assets from creditors and lawsuits.
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