A living trust is a trust you make during your lifetime, instead of one made on your behalf after your death. Because a living trust is made during your lifetime, there can be many benefits to creating one. However, some of the benefits you receive will depend on the type of living trust you create, so if you are considering including a living trust in your estate plan, one of your first decisions may be if you want your trust to be revocable or irrevocable.
The main difference between the two types of trust may seem self-evident based on their names. A revocable living trust is revocable, and an irrevocable living trust is not revocable. However, a deeper look shows that the ability to alter or revoke a trust causes other differences as well. Understanding these differences can help you choose the best trust for your situation.
Some benefits are the same for both types of living trust
Both types of living trust allow the assets in them to avoid probate. This allows your assets and beneficiaries to stay out of public record.
Both types of living trust also provide a way for you to pass on your assets to your loved ones after your death. You can also have more control than a will allows you to have over the circumstances surrounding the distribution of your assets.
What benefits are specific to revocable living trusts?
However, there are also differences between what a revocable living trust and an irrevocable living trust can offer. Revocable trusts are a popular choice because they allow you to name yourself as the trustee and manage the assets in the trust yourself. This means that you can continue managing your own assets in much the same way you always have. If you reach a point when you become unable to manage the assets in the trust, your successor trustee can step in and manage them on your behalf.
Your control over the assets may make a revocable living trust a very appealing option. However, that control can also work against you. For example, the assets in your trust are often still considered your assets, so they can be taxed as part of your estate and can affect your eligibility for some governmental benefits. The assets in your trust also lack protection from creditors or legal liabilities.
What benefits are associated only with irrevocable trusts?
You must choose someone else to serve as the trustee of an living trust, and you cannot alter or revoke the trust once it is created and funded. This means that once you transfer ownership of your assets to the trust, the trustee will be responsible for managing those assets according to the provisions in the trust.
The lack of control with irrevocable living trusts may be a turn-off, but it is because of your lack of control that you could receive certain benefits. These benefits include assets in the trust:
- Not being taxed as part of your estate
- Not counting against your eligibility for Medicaid or some other government benefits
- Receiving protection from creditors and legal judgments
Choosing a revocable or irrevocable living trust should depend on your personal situation and your estate planning goals. Because every person’s situation and estate planning goals are different, the best type of trust for one person’s situation may not be the best option for someone else. Your understanding of what each type of trust can do can help you select the best trust for you.