Trusts act as separate legal entities which an individual can form to manage his/her assets. Trusts are highly effective financial vehicles which are regularly used in estate planning, asset protection, tax optimisation, and more. There are two distinct types of trusts: a revocable trust (also called a “living trust”) and an irrevocable trust.
These two basic types of trusts have distinct features which make them comparatively more or less useful in different circumstances. Simply put, a revocable trust is one where the terms can be modified at any time by the owner of the trust, or even cancelled entirely. An irrevocable trust, on the other hand, is one that cannot be changed after it has been created without the express consent of the beneficiaries (and even then, limitations often apply).
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While many instinctively might feel that a revocable trust is more appealing, there are actually relative advantages and disadvantages to both. We will explore each in turn, and discuss which one to choose depending on your specific requirements.
A revocable trust is a type of trust that can be changed or cancelled at any time by the grantor (i.e., the person who establishes and funds the trust). This means that whilst the grantor of the trust is alive, they can remove beneficiaries and/or designate new ones, alter the provisions about how assets are managed, add or remove assets to the trust, or even cancel the trust entirely.
The most obvious benefit of a revocable trust is that it allows the grantor to retain complete control and flexibility over the assets in the trust and how they are distributed. Circumstances change all the time, and so most people prefer the idea of being able to adapt the terms of a trust to changes in their situation.
Key benefits and uses of revocable trusts include:
While revocable trusts might offer greater flexibility and control for the owner of the trust, this comes with some disadvantages too:
An irrevocable trust is one where the terms of the trust cannot be altered or terminated by the grantor after the trust has been established and the deed signed. Only under exceptionally rare circumstances, and with the consent of the trust’s beneficiaries, can any changes be made. Once assets are transferred to the trust, the grantor relinquishes ownership and control of the assets.
There are various types of irrevocable trusts, including: Irrevocable Life Insurance Trust, Asset Protection Trust, and Charitable Remainder Trust. While these have different features, the main distinguishing characteristic is the same (the trust cannot be changed or revoked). Asset Protection Trusts have been used with great effect to shield assets from creditors and court cases, as they allow the grantor to simultaneously be the sole beneficiary and therefore maintain all benefits of the assets without being the legal owner of them.
The primary reasons for using an irrevocable trust are tax optimisation and asset protection.
While it might not seem ideal to transfer ownership of your assets into a trust which cannot be terminated or changed, irrevocable trusts come with some unique benefits compared to revocable trusts. The main advantages of irrevocable trusts are:
For more: Irrevocable Trusts Disadvantages
Trusts are useful financial instruments which can be used in a variety of circumstances. There are distinct differences between revocable and irrevocable trusts, which make each more suitable in specific situations.
If you are looking to use a trust simply as a tool to avoid probate procedures, provide some measure of tax relief, and at the same time maintain full control and flexibility, then a revocable trust is the best choice.
If, on the other hand, you need a financial instrument which can provide the utmost in privacy, asset protection, and tax optimisation, without the need to keep control and flexibility, then an irrevocable trust (and specifically an asset protection trust) is the right option for you.
Whatever your needs may be, it is best to consult the advice of a trust expert who can help you determine the best trust structure to suit your needs, and guide you through the steps needed to establish it.
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