If you'd like to set up a trust with your assets so they can be portioned out to your beneficiaries either before or after your death, you need to choose between a revocable and an irrevocable trust.
The following are five things you should be aware of to help you decide between these two trust types:
In an irrevocable trust, you will no longer technically own property placed in the trust.
The biggest distinction between an irrevocable and revocable trust is that all the property placed in the trust is actually property of the trust itself. It's no longer the property of the grantor.
However, the grantor can continue to use property in the trust as usual but in a sense actually rents out the property until it's passed on to beneficiaries.
An irrevocable trust is better at protecting trust assets from potential detractors of trust funds like a beneficiary's creditors.
Perhaps the biggest reason why people choose irrevocable trusts is because they treat trust assets like they're owned by a separate entity.
As such, these assets can't be considered as the possessions of either the grantor or the beneficiaries. The grantor or beneficiaries creditors therefore can't touch these assets.
While an irrevocable trust cannot be easily changed once it is set up, a revocable trust can more easily be modified over time.
Irrevocable trusts are very effective at protecting assets because they cannot easily be modified. A revocable trust can always be changed according to the grantor's wishes.
An irrevocable trust can help avoid estate taxes because assets in the trust are not included in the calculation of the total value of the estate of the deceased at the time of death.
At the time of a grantor's death, estate taxes are usually required on all of his or her possessions that are being passed on to beneficiaries. However, this is not the case with possessions that have been placed in an irrevocable trust.
Again, an irrevocable trust means that the grantor technically no longer owns the property in question. Trust assets are therefore not subject to estate taxes.
An irrevocable trust usually has its own tax identification number.
The way taxes are filed differs for the grantor depending on whether the trust is revocable or irrevocable.
With a revocable trust, taxes are filed on any money the trust makes using a 1040. On the other hand, an irrevocable trust is treated like a separate entity by being granted its own tax identification number. Any income on the estate is reported in a form known as a K-1 that the grantor will have to report when filing income taxes.
For more information on estate law, contact a company like Wilson Deege Despotovich Riemenschneider & Rittgers.