You may already have a will or have plans to create one. However, if you have substantial assets, have a complicated situation or value privacy, you may benefit from creating a living trust as well as a will. A living trust is a type of trust that you can create during your lifetime. This is different from a testamentary trust, which is a type of trust created by your will after your death.
A living trust can be either revocable or irrevocable. Although the main difference may be self-evident, it is not the only difference. If you think a living trust may be right for your situation, it is important to fully understand your options.
A revocable living trust
If you create a revocable living trust, you will be able to modify or cancel it at any time. This may be a favorable quality because you can change the details of the trust if you change your mind, if your situation changes or if a loved one’s situation changes.
Another potential benefit is that this type of trust allows you to name yourself as the trustee. This means that, until you pass away, you can manage the assets you put into the trust.
However, the flexibility and control that are so favorable in a revocable trust can also potentially leave your assets vulnerable. Because you are still in control of the assets, they can be taken to settle debts or legal judgments. They also can count as your assets for legal purposes, which could affect your eligibility for certain government programs, such as Medicaid. The property could also be subject to estate taxes when you pass away.
An irrevocable living trust
An irrevocable living trust does not offer the flexibility or control that a revocable trust offers. You usually cannot alter the trust once you create it, and you must name someone else as the trustee. However, an irrevocable trust offers a level of protection that a revocable trust cannot.
Because someone else manages the assets you put into your irrevocable trust, the assets do not count as yours. This means that they cannot be taken away to pay off debts or to settle a judgment. They cannot count against your eligibility for government programs. The assets in the trust can also avoid estate taxes.
Other important considerations
When weighing your options, it is important to realize that the two types of living trust share some benefits. Some of these shared benefits include:
- Designating someone to manage certain assets in case you become too ill to manage them yourself
- Allowing the assets in the trust to avoid probate
- Keeping the assets in the trust (and who inherits them) out of public record
The right type of living trust for you will depend on your estate planning goals and the particulars of your situation. Some people value the control that they can have with a revocable living trust. Other people prefer the security of an irrevocable living trust.