There are two basic types of trusts, a revocable trust and an irrevocable trust. Which trust is the best to use?
The direct answer is that this is a complicated decision which must take many personal details into account. But as you may know, a revocable trust cannot give you Asset Protection, just as you can revoke your trust, so too can your creditors. For creditor protection, you need an irrevocable trust. But the obvious disadvantage with an irrevocable trust is that you can’t revoke the trust and reclaim your assets. You essentially lose control over the trust assets. Irrevocable trusts protect assets for the same reason that revocable trusts cannot. Your creditors can unwind the revocable living trust, but not the irrevocable trust. Therefore, irrevocable trust assets are generally safer from creditors and lawsuits. However, the irrevocable trust carries this heavy price of lost control over your assets.
Most people consider that loss in control too steep of a price for protection. But you might use an irrevocable trust when you’d inevitably gift the assets to the beneficiaries anyway and you don’t foresee needing the assets for yourself. Your ‘price’ then is not particularly hefty. You don’t personally need the assets, and the trust accomplishes what you want – to distribute the assets to your beneficiaries (usually your children) at some future time.
When deciding whether to use an irrevocable trust keep four cautions in mind:
1. You can’t reserve any power to revoke, rescind or amend the trust, or retain any direct or indirect rights to reclaim property transferred to the trust. In sum, there can be ‘no strings attached.’
2. You can’t fully dictate how the trust property will be managed or invested.
3. You can’t be the trustee, nor can you appoint your spouse, relative or close personal friend to be the trustee. Your trustee must be arms-length.
4. In most states you cannot be the beneficiary as this creates a self-settled trust.
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