A trust is a legal arrangement whereby a third party holds your assets on behalf of one or more beneficiaries. Trusts can be established to transfer assets to heirs seamlessly. With the proper setup, a trust may also be beneficial to your estate in terms of saving taxes and avoiding probate.
Revocable trusts are created during the lifetime of the grantor, and they can be modified or revoked entirely as per the wishes of the trust maker. Usually, the trust maker serves as the initial trustee and can remove property from the trust during their lifetime. On the other hand, an irrevocable trust cannot be altered, modified or canceled once created. No one, including the trust maker, can remove property from an irrevocable trust.
While each arrangement has its pros and cons, the significant differences between the two types of trusts are outlined below:
Ownership of property
Usually, assets held in a revocable trust belong to the trust maker until they are transferred. However, for an irrevocable trust, any property held under it is owned by the trust. In essence, such property benefits the beneficiaries, but the trustee manages and controls it and the trust owns it.
Protection of assets
Since the trust maker retains control over their assets in a revocable trust, they are not protected from creditors. In contrast, assets held in an irrevocable trust belong to the trust and are protected from the trust maker’s or beneficiaries’ creditors. Therefore, creditors cannot attach property held in an irrevocable trust.
Which is the right trust for you?
It all depends on your end objectives. Understanding how each type of trust works will help you make an informed decision and settle on the best option for your estate plans.