Navigating the complexities of estate planning can be daunting, especially for high-asset individuals. The goal is to ensure a seamless transfer of assets to chosen beneficiaries, but tax considerations, probate proceedings and potential creditors can complicate the process. One of the tools often employed in estate planning is a trust, which is a legal entity designed to hold and manage assets for the benefit of designated individuals.
Trusts come in various forms, each with unique features, benefits and drawbacks. Two of the most common types, especially for high-asset estate planning, are revocable trusts and irrevocable trusts. Though they may seem similar at first glance, understanding the differences between these two types of trusts is critical when constructing an effective estate plan.
Revocable trusts
Revocable or living trusts are popular for estate planning as they offer flexibility and control. The person who creates the trust, known as the grantor, can manage the assets within the trust and make changes or even revoke the trust entirely during their lifetime. This control extends to adding or removing assets, changing beneficiaries or modifying the terms of the trust.
The primary benefits of revocable trusts are their flexibility and ability to avoid probate, the legal process of distributing a deceased person’s assets. By transferring assets into a revocable trust, these assets can pass directly to the beneficiaries without going through probate, potentially saving time, the risk of having one’s wishes successfully contested and money.
Irrevocable trusts
An irrevocable trust cannot be altered or revoked without the consent of the trust’s beneficiaries and/or the court once it has been established. The grantor gives up control of the assets placed in the trust.
Despite this lack of flexibility, irrevocable trusts offer significant benefits, particularly for high-asset individuals. These include potential tax benefits, as assets in the trust aren’t considered part of the grantor’s estate and may not be subject to estate tax obligations. Additionally, because the grantor no longer controls the assets, they are typically protected from creditors and legal judgments.
Revocable and irrevocable trusts each have their place in high-asset estate planning, as they offer unique benefits. The choice between them depends mainly on the individual’s circumstances, goals and comfort with surrendering control of their assets.
