Placing assets in trust is a sound strategy when it comes to asset protection and estate planning, but there are many different forms of trusts to choose from. Two of the main categories are irrevocable and revocable trusts. These each have their own advantages and drawbacks, so it’s important to make sure you choose the structure that works for your situation.
A revocable trust is one that can be modified after it has been formed. If you need to change or retain control of the assets in the trust, add or change the designated beneficiaries or trustee, or make modifications to the distribution of assets held in the trust, then a revocable trust will allow you to do that while it’s in force.
Revocable trusts are useful when it comes to planning for disability or avoiding probate. If you become incapacitated, this type of trust will simplify the process of handling the control of your assets while still giving you the flexibility to make changes as needed.
The drawbacks of these types of trusts stem from the fact that you still legally own the assets placed within the trust. This means that if you are sued, those assets won’t be shielded from creditors. In addition, after you pass on, they will count toward your estate, possibly resulting in the assessment of estate taxes.
By contrast to a revocable trust, an irrevocable trust cannot be modified or dissolved after it has been formed. This means you have no control over the trust terms or the assets placed within it after everything is set up. For this reason, careful planning is necessary in order to make sure it will work for your situation. Irrevocable trusts are typically best for avoiding estate taxes or protecting assets that may be at risk.
In many cases, a revocable living trust may be converted into an irrevocable trust after certain conditions are met (such as death). This allows some flexibility to the trust during your lifetime while providing secure protection to your assets after you pass on. Once the trust converts, it can no longer be touched by creditors or be subject to estate taxes.
Irrevocable trusts can be used to shield assets during your lifetime. Since they are not considered to be controlled or owned by you, they are shielded from creditors if you are sued. Some people also choose to use irrevocable trusts to donate to charity by including conditions that dispense assets to humanitarian causes.
Forming a Trust
Choosing the trust structure that will work best for you is a matter of knowing your situation and your potential liabilities. The mount of wealth you need to protect, the odds of facing a lawsuit, and your current family situation all factor into whether you need the flexibility of a revocable trust or the ironclad protection offered by an irrevocable arrangement.
When determining the best option for your situation, it’s best to consult with an estate planning attorney. Hart David Carson can provide you with the guidance and legal services you need in order to protect your assets from seizure and undue taxation.