Trusts are one piece of an estate plan that can help bring some structure to passing assets to the next generation. There are many different types of trusts, but the focus in this article will be around revocable and irrevocable trusts. Which is the “better” option will depend on the financial situation and estate planning goals.
Here are a few key definitions when referring to trusts/estate planning:
A revocable trust (also known as a revocable living trust) is a trust that can be revoked, meaning it can be changed or updated at any time when the grantor is still living. This can be a good option if you want to establish a trust but want to have control over your estate and assets while you are living. Upon death, a revocable trust can become irrevocable, meaning it can incorporate protections that you want in place after death.
Here are some of the benefits of revocable trusts:
However, there are also a few disadvantages of revocable trusts:
Revocable trusts have their place in estate planning and are generally recommended for families that have a net worth under the federal estate exemption (currently $12.06 million per spouse in 2022).
An irrevocable trust cannot be easily changed or amended (very few instances that allow changes to be made) while the grantor is alive. In most cases, the trustee and beneficiaries must approve any changes.
Here are some advantages of irrevocable trusts:
There are also a few disadvantages:
Assets that are held inside of the trust should also be carefully considered. In 2022, any income generated by a trust over $13,450 is taxed at the highest federal tax rate of 37%. Because of this, it is not recommended to hold assets that have interest (such as corporate bonds). Instead, assets that are growth oriented, or permanent life insurance, can be the most tax efficient assets to hold inside of a trust.
When deciding on which one would be right for you, there are numerous factors that need to be considered, such as, net worth, estate planning goals, etc. Generally, if the grantor wants to maintain control over the assets, a revocable trust makes more sense. But if there is a larger estate, then an irrevocable trust can help save on estate taxes by using the trust as a mechanism to gift into each year.
As always, you should consult with a trusted estate planning attorney before implementing any trusts to your estate plan.
Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.
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This content has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment advice or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. The tax and estate planning information provided is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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