Every adult should have an estate plan to let their heirs and beneficiaries know how to handle their property after they have passed away. Most people are familiar with wills as part of estate planning, but many aren’t as familiar with trusts.
A trust is a legal entity that holds assets on behalf of beneficiaries. While there are many different types of trusts, there are two categories into which they are broadly divided – irrevocable and revocable. Defining the purpose of a trust and looking at the circumstances of your intended beneficiaries may help you to more confidently decide the exact kind of trust structure that’s appropriate for your unique situation.
What is an irrevocable trust?
A creator can’t change or alter an irrevocable trust unless they obtain the court’s approval or the approval of everyone named in the trust. While some people are wary of giving up control of their assets, they may benefit from thoroughly considering the benefits of this type of trust before dismissing the opportunity.
One of the primary benefits of an irrevocable trust is that it protects assets from the creator’s creditors and from the beneficiaries’ creditors for as long as the assets remain held within the trust. Since the creator doesn’t have control of the assets, creditors can’t claim part of the trust to receive payment for debts. Even if the creator is sued, the contents of the trust will remain protected.
What is a revocable trust?
A creator can change the terms of a revocable trust during their lifetime. They can even void the trust if they desire. But because the designated trustee maintains control of the assets within the trust, there isn’t protection from creditors. This means that a successful lawsuit from a creditor can cut into the inheritance of someone’s beneficiaries, but some creators find this a suitable risk so they can maintain ongoing control over their assets. Additionally, placing assets in a trust – even a revocable one – shields them from probate, which is not an insignificant benefit of this kind of legal resource.
If you’re thinking about your legacy, it can be helpful to review the different types of trusts that might meet your needs. Seeking legal guidance may be a good place to start.