If you have worked hard all your life, it makes sense to want to leave as much of your assets as possible to the people you love. This is where estate planning comes in. One of the most effective estate planning tools you can use to set aside assets for your loved ones is a trust.
Basically, a trust is a fiduciary relationship that lets you designate a third party known as a trustee to hold and manage certain assets on behalf of your beneficiaries. There are broadly two types of trusts: revocable and irrevocable trusts. To make an informed decision, it is important to understand how each type of trust works.
Understanding a revocable trust
A revocable or a living trust, as the name suggests, can be amended or discarded at any time. A revocable trust is ideal for grantors who want to have greater control over their assets. Simply put, a revocable trust allows you to do the following:
- Add or remove assets from the trust
- Add or remove beneficiaries
- Change the terms of the trust instrument
- Sell off the assets in the trust
Once you’ve set up a revocable trust, you may designate yourself as a trustee or a co-trustee and retain control over the trust and its terms. If you choose this route, however, then you must make provisions for a successor trustee who will take over in the event of your incapacitation or demise.
Understanding an irrevocable trust
An irrevocable trust is a direct opposite of a revocable trust. Upon establishing an irrevocable trust, you will lose control over the assets held in it. Furthermore, you may not change its terms without involving the court. An irrevocable trust is ideal for grantors who want to reduce the sizes of their estates and, with it, estate taxes and the risk of assets remaining vulnerable to creditors.
Safeguarding your legacy
Estate planning is a crucial component of a holistic financial plan. Understanding the different types of trusts available can help you make an informed decision and better safeguard your legacy while realizing your estate planning goals as a whole.