If you are thinking about creating an estate plan, there is a pretty good chance you are wondering if you should set up a trust and, if so, which trust. Just like a will, this estate planning tool allows you to determine what will happen to your assets when you pass on.
There are basically two main types of trusts: revocable and irrevocable trusts. And each trust is meant to serve specific roles during the estate planning process. So how do you choose the right trust for your estate planning needs?
Choosing the right trust for your estate planning
To make an informed decision, it helps to start off by understanding how these two types of trusts work. One of the key differences between a revocable and an irrevocable trust is that you can make amendments on a revocable trust at any time. For instance, you can add or remove beneficiaries or assets onto a revocable trust. You can also dissolve the entire trust if you feel it is no longer serving its purpose.
Flexibility is one of the main reasons why most people set up revocable trusts. Additionally, a revocable trust offers privacy and it can also help you avoid probate.
On the other hand, once you create an irrevocable trust, you cannot change it. An irrevocable trust allows you to designate the assets of your choosing for transfer to the beneficiary through the trust. Thereafter, these assets become the property of the beneficiary. This means that you cannot modify, amend or dissolve the trust without the beneficiary’s approval or without a court order.
An Irrevocable trust can protect the assets held in it from taxation and, thus, reduce your estate’s tax liability. And like a revocable trust, an irrevocable trust can help you avoid probate and enjoy privacy.
Estate planning is an integral part of a holistic financial plan. Find out how you can create an estate plan that can protect your rights and interests.