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How do the 2 main types of trusts differ?

On Behalf of | Sep 21, 2021 | Estate Planning

There are two main types of trusts: revocable trusts and irrevocable trusts. These trusts are both created while you’re still alive, so they’re called living trusts.

The ways that they differ is in how you control your assets, the tax benefits and if you have a right to alter them once they are created.

Revocable trusts

Revocable trusts are the first type of trust that you should know about. A revocable trust allows you to retain the right to control your assets after placing them into the trust. You have the right to regain control at any time and may rescind the trust in the future if you wish.

You, the settlor, are the legal owner of assets in this kind of trust. That means that you will need to pay taxes on investment returns and other income. Revocable trusts are also vulnerable to creditors if you ever find yourself in debt or going into bankruptcy.

The trust does set up a plan for passing on your assets to your beneficiaries.

Irrevocable trusts

Irrevocable trusts are different because once you place assets into the trust, they’re no longer yours. You have no right to revoke the trust in the future, and the trustee is responsible for paying taxes on the trust’s assets.

Irrevocable trusts are often favored because they protect assets against creditors. This is because assets in an irrevocable trust are no longer in your name.

Which kind of trust is right for you?

The kind of trust or trusts you use will depend on your goals for your beneficiaries and assets. If you are most concerned about tax protections, then an irrevocable trust may be best. If you are more concerned about receiving compensation from growing assets, then you might consider a revocable trust.

Get to know your options before you decide

Both types have benefits and downsides, so it is a good idea to go over them while you work through the estate planning process. Remember that these are just a few general trust types. There are also other, more specific, trusts that could be right for your situation.