A “trust” is a legal entity someone will set up to protect and manage their assets. A third party called the “trustee” manages any assets that are placed inside the trust. Once the owner of the trust passes away, the trustee will then distribute the assets. However, this must be done according to the guidelines they were given for the trust. Now that we have covered what a trust is, let’s take a look at the differences between a revocable trust vs. irrevocable trust.
Also known as “living trust”, a revocable trust means the terms of the trust can be changed at any time. For example, new beneficiaries may be added, or old ones removed. Essentially, their flexibility is valuable and makes these a very common type of trust.
However, revocable trusts do have other areas to keep in mind. The assets in a revocable trust will be subjected to federal and state taxes when the owner passes. These types of trusts also do not offer the same type of protection from creditors that irrevocable trusts do. If they are sued, the assets may be used for settlement.
On the other hand, the terms of irrevocable trusts cannot be changed. In a nutshell, that means they lack the flexibility of revocable trusts. Instead, irrevocable trusts offer their own set of benefits. Their biggest advantage is for tax purposes. Irrevocable trusts are not vulnerable to estate taxes once the owner passes away. Even more, the assets can generate additional income without being taxed.
In conclusion, irrevocable trusts sacrifice flexibility for protection from taxes. Both a revocable trust vs. irrevocable trust have their own advantages and can be beneficial in different situations. Choosing which trust is best for you depends on your own specific circumstances.
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