A trust is a legal instrument where one person (the trustor) grants another person (the trustee) the legal right to hold title of assets for the benefit of a third party (the beneficiary). Depending on the type of trust, they’re often set up for a number of purposes, including:
There are many different types of trusts, but one of the main differentiators that allows a trust to function for different purposes is whether that trust is revocable or irrevocable.
One can alter the terms of a revocable trust at any time. The owner could decide to eliminate or add beneficiaries and modify the terms under which assets are managed.
While this offers flexibility, it also greatly limits some of the benefits trusts can offer. Typically, revocable trusts do not confer tax shelter benefits or protection from creditors. In many cases, however, they can avoid the probate process and provide greater privacy than a will.
An irrevocable trust, on the other hand, cannot be changed once it’s established except under very rare circumstances. And any changes generally require the intervention of a judge, and the consent of all parties involved. You’re permanently giving up control of your assets by placing them in an irrevocable trust. This is why it’s important to be very certain that your needs or reasons for establishing an irrevocable trust are not likely to change over time.
Irrevocable trusts require serious contemplation, but they can offer a number of advantages over revocable trusts, including protection from creditors and lawsuits, tax shelter benefits and asset protection from Medicaid. In essence, there is a direct tradeoff between control of assets and the benefits and protection a trust offers.