A strong financial plan does more than just plan for the present, it prepares for the future. Depending on one’s level of wealth, part of that preparation may include the use of a trust. The type of trust that is right for your financial goals will vary depending on what you are looking to achieve. Although there are many types of trusts, one of the first big decisions is whether to go with a revocable or irrevocable trust.
What is the difference between these two types of trusts?
There are a number of differences between these two legal tools. One of the biggest differences is the level of control present with each. In most cases once an irrevocable trust is set up, the creator can no longer make changes without the consent of the beneficiaries. In contrast, the creator generally remains in control of a revocable trust.
If you lose control of your assets, why would you want an irrevocable trust?
Financial experts point to two big benefits when it comes to creating an irrevocable trust. First, the taxes. An irrevocable trust can provide the creator with both federal and state tax benefits because they no longer own the assets which fund the trust. Instead, the trust now essentially owns those assets.
Second, creditor protection. When assets are titled in your name, they are open to attacks from creditors. This type of trust can provide protection of assets in the event of a divorce or for those who are in professions that are often subject to lawsuits — like surgeons or real estate developers.
There is a third reason to use an irrevocable trust: eligibility for government benefits. Those who are looking to qualify for Medicaid benefits, for example, can benefit from putting assets into an irrevocable trust. It is important to do so carefully, as the government has very specific rules about transferring funds prior to eligibility.