You will likely hear a lot about trusts when creating an estate plan. Trusts are an excellent addition to any estate plan as they give you flexibility and allow some or all of your estate to bypass probate.
The two main types of trusts are revocable and irrevocable, and it’s important to understand the difference and when each may be the better option.
How much control do you want?
Revocable trusts are popular because they allow you to create guidelines for how your assets will be handled and distributed. Even though the assets pass out of your control and into the trustee’s, you can make changes to the trust in regard to beneficiaries or how assets will be distributed. You can also dissolve the trust if you wish.
With an irrevocable trust, once the assets are part of the trust, you no longer have any control over them. You are not able to change the terms of the trust or the beneficiaries or pull any of the assets out.
So, why would someone want to create an irrevocable trust and give up all control over their assets? Because they offer a high level of asset protection. You can protect your wealth from creditors and lawsuits because it is legally no longer yours. An example would be a business owner who may be at risk for lawsuits. By placing their assets within the trust, even if the business fails, the trust assets remain protected.
Another reason why people choose irrevocable trusts is to minimize the estate taxes their heirs will be liable for when they pass away. Currently, the estate tax exemption is $13.99 million, but that is expected to drop to $7 million in 2026. For families that have multiple real estate holdings, their estate can reach $13.99 quickly. Placing those properties into an irrevocable trust, they have decreased the value of their taxable estate.
An irrevocable trust may be beneficial for a few other reasons, such as Medicaid planning. But considering the permanent nature of these types of trusts, your decision requires a lot of thought and planning. You will need to review your options and goals with someone who can help you make the right choice.