As Delaware residents plan for their retirement, many determine that an estate plan is especially important when facing the reality of this new phase of life. Many with significant assets may opt for a living trust to handle their money. With a trust, your assets are handled by a third party. This means that after you die, the third party will also distribute your assets, but they must abide by the conditions you have set.
According to Investopedia, there are two types of living trusts – revocable and irrevocable. While it may seem like common sense that most trusts are revocable, there are also benefits to choosing the irrevocable option.
A revocable trust can be changed at any time. After the trust is set up, you can add beneficiaries, remove them or change them. You can also change the stipulations you put on the trust to specify how it is managed. This allows for a certain amount of flexibility when setting up your trust, but also has its disadvantages.
Because you still retain some control over a living trust, the assets can still be susceptible to creditors. If you are sued, for example, you may be required to liquidate your trust in order to pay any judgment. With a living trust, you are also required to pay estate taxes, both state and federal.
An irrevocable trust cannot be changed once it is signed. This means that you are not allowed to change anything except in extremely rare cases. You sign over all type of ownership to your assets and estate with an irrevocable trust. Since you have so little control over your estate with an irrevocable trust, why would you ever choose that option?
The answer is simple. Because you have given up control over your assets, they are no longer part of your taxable estate. This means that once you die, your estate is not subject to estate tax. You are also relieved of any tax responsibility for income created by your assets.
This information is for educational purposes and should not be interpreted as legal advice.