Busy Family Life: Understanding the Difference Between Trusts

Trusts are often considered a tool useful only to the wealthy. This stereotype leads many middle class families to ignore the benefits that a trust can offer them. A trust can help your family protect its assets, simplify asset distribution after death, and restrict taxation of asset growth. A trust may be helpful no matter what your income or tax bracket.

Revocable Trust

Revocable trusts are trusts that take your assets and, upon death, distribute them as you stipulate in the trust document. The stipulations and appointments within a revocable trust are not final and can be revoked. The assets can be taken out of the trust, the trustee and beneficiary can be changed, and you can be the Trustee of your own revocable trust.

Benefits of Revocable Trusts: Revocable trusts make it easier for your heirs to settle your estate. Since there is no will, there is no need for probate. All of the assets in the trust are available for immediate distribution based on the guidelines of the trust.

Irrevocable Trust

An irrevocable trust is a trust that takes assets out of your hands and puts them into the trust—forever. Once you gift assets to an irrevocable trust, you cannot take them out. Additionally, you must give control of the trust to a third party trustee. You also cannot change the terms of the trust once it has been established.

Benefits of Irrevocable Trusts: In addition to removing the need for probate, irrevocable trusts create a safer way to preserve your assets for your heirs. Because you do not own or control the assets, they cannot be touched by creditors. This is a great way to protect your assets for your heirs. In addition, assets that gain value inside the trust are not taxable to you personally, although the trust itself may be considered taxable.

Irrevocable Life Insurance Trust

Irrevocable life insurance trusts (ILIT) are like irrevocable trusts, but they are created to hold a life insurance policy. Once in an ILIT, the trust is named the owner and the beneficiary of the life insurance policy. Only the trustee will be permitted to make changes to the policy or surrender the policy. Upon policy surrender, cash surrender values are awarded to the trust.

Benefits of Irrevocable Life Insurance Trusts: Like a regular irrevocable trust, ILITs are safe from creditors. They can also help you to ensure that the death benefit proceeds are given to your beneficiary in a manner that best suits them, rather than in one lump sum.