Types of Trust Funds
Trust funds come in two main types each with distinct characteristics and purposes:
1. Revocable Trust Funds
Also known as living trusts, revocable trusts can be changed, modified, or revoked by the grantor during their lifetime. These trusts offer flexibility and control, allowing the grantor to make adjustments as circumstances change. Typically, the grantor serves as the trustee and maintains control over the trust assets. Revocable trusts are commonly used for estate planning purposes, particularly to avoid probate, a legal process that validates a will and distributes assets after death. By placing assets in a revocable trust, they can pass directly to beneficiaries upon the grantor’s death, bypassing probate and providing privacy regarding the distribution of assets. However, revocable trusts do not offer asset protection benefits because the grantor retains control and ownership of the trust assets.
2. Irrevocable Trust Funds
In contrast, irrevocable trusts cannot be changed or revoked by the grantor once established, providing more permanent asset protection and tax benefits. Once assets are transferred into an irrevocable trust, they belong to the trust and are managed by a trustee according to the terms set forth in the trust agreement. Because the grantor relinquishes control and ownership of the assets, they are shielded from creditors and legal judgments. Irrevocable trusts are commonly used for asset protection, estate tax planning, medical planning, and charitable giving. Assets held in an irrevocable trust are generally not considered part of the grantor’s taxable estate, reducing potential estate taxes upon death. However, establishing an irrevocable trust requires careful consideration and planning, as it involves relinquishing control over the assets and may have tax consequences.
In summary, revocable trusts offer flexibility and control during the grantor’s lifetime, primarily used for probate avoidance and estate planning. Irrevocable trusts provide permanent asset protection and tax benefits, but require the grantor to give up control and ownership of the assets.