Trusts are an essential component of any estate planning process. Done right, these tools can hold assets for your beneficiaries and ensure that your wishes and legacy are honored long after you are gone.
There are two main types of trusts: revocable and irrevocable trusts. If you are considering incorporating a trust into your estate plan, then it’s important that you understand how these trusts differ so you can make an informed decision.
Understanding revocable trusts
Also known as a living trust, a revocable trust can be canceled or revoked at any time during your lifetime as long as you have the mental capacity to do so. This type of trust allows you to control the trust’s terms as well as the assets held in it. In other words, you may modify the terms of the trust, transfer assets in and out of it and change your beneficiaries. A revocable trust is ideal under the following circumstances:
When you want to avoid probate – since all assets contained in the trust are owned by the trust and governed by its instruments, such assets are not subject to probate upon your passing.
Optimize privacy — probate is a public process. By holding your assets in a trust, you will retain privacy over these assets as well as their distribution.
Understanding irrevocable trusts
Unlike a revocable trust, you may not change or modify an irrevocable trust. In other words, you cannot cancel, terminate or make any changes to any of its provisions without involving the court. This lack of flexibility makes irrevocable trusts less common. That said, you may set up this type of trust if you want to achieve the following:
Greater asset protection – an irrevocable trust offers a higher level of protection for your assets from certain types of debts and legal judgments.
Protection from estate taxes – assets that are held in an irrevocable trust are never considered when calculating your estate tax. This potentially reduces or eliminates estate tax altogether.
The choice between a revocable and an irrevocable trust basically boils down to your personal preferences and estate planning goals. Understanding how North Carolina estate planning laws work can help you make an informed decision while protecting your interests.