A trust is a financial arrangement between three parties:
Basically, how a trust works is that the trustor (also referred to as the settlor or grantor) transfers title to his assets from his own name to the name of the trust. The trust will then be managed by the trustee for the benefit of the beneficiary.
Trusts are an excellent way to manage your assets while you are alive and able, during times of incapacity, and after you pass away. In addition, they are a great way to distribute your assets to your beneficiaries while avoiding probate.
Another big advantage to using trusts is the level of privacy they offer. Lack of privacy is an aspect of probate that most people dislike. Wills always have to go through probate, which means court involvement and no privacy.
But, unlike probate, a trust never needs to be filed in court or anywhere else. As a trust is not made public, your estate can be distributed in private if all goes as planned.
Yet another advantage of some types of trusts is that they can be written so that someone else can automatically jump into the driver's seat and handle your affairs if you become ill or incapacitated. This is an aspect of a type of trust called a revocable trust.
A revocable living trust can allow you to cover three possible phases of your life:
The main and most direct advantage to using a revocable trust, however, is that it can enable your estate to avoid probate when used correctly and in concert with other probate avoidance procedures.
The biggest disadvantage to revocable trust, however, is that since you can still access the trust assets whenever you need, the trust assets are still technically yours and available to your creditors and the IRS. This where an irrevocable trust can help.
Another kind of living trust is an irrevocable trust. Just like it sounds, an irrevocable trust is one that you cannot revoke or take back from. So, when you place assets into an irrevocable trust you, you can't withdraw them later.
An irrevocable trust cannot even be amended. If you create and fund an irrevocable trust, you are stuck with the decisions you have made as far as the trustee you have chosen and the instructions you included in the trust document.
An irrevocable trust is not as common as a revocable trust, but it can play just as important a role in your estate plan. The advantages of an irrevocable living trust are twofold.
There are also some disadvantages to an irrevocable trust when compared to a revocable trust. Most notable, you (as the settlor or grantor) lose control over any asset you place in an irrevocable trust. So, when you transfer property into an irrevocable trust, you lose both access to and control over that asset.
Virtually any sort of asset can be held in an irrevocable trust. But, there are some very good advantages to holding life insurance in an irrevocable trust. In fact, this is a special kind of irrevocable trust that is referred to as an Irrevocable Life Insurance Trust (ILIT).
An ILIT is a trust used to protect life insurance and death benefits from estate taxes. But, besides allowing assets to pass free of estate taxes, an ILIT can also ensure that any proceeds generated by the trust will be exempt from federal income taxes. This means more money to be distributed to your beneficiaries.
If you are still unsure which kind of trust is right for you, or if you need more help understanding the differences between a revocable trust and an irrevocable trust, an experienced Colorado estate planning attorney can help. Working with a good estate planning attorney can ensure that you, your assets, and beneficiaries are well taken care of within your overall estate plan.