When planning your estate, choosing the right type of trust plays a significant role in how you distribute your assets and handle taxes. Trusts help you ensure that your wealth passes to the right beneficiaries, potentially avoiding probate and offering flexibility.
You have several options when deciding on a trust, and understanding the differences helps you make the best decision for your needs.
Revocable trusts: control and flexibility
A revocable trust allows you to retain full control over your assets during your lifetime. You can make changes or revoke the trust at any point. This flexibility offers a major advantage. With a revocable trust, assets placed in the trust still remain part of your estate for tax purposes, and you can serve as the trustee, managing the trust as you see fit.
In Virginia and Maryland, revocable trusts can be especially useful for avoiding probate, which can be time-consuming and expensive. However, because the trust is revocable, it does not offer asset protection from creditors, and the assets remain part of your estate when you pass away.
Irrevocable trusts: protection and tax benefits
Unlike a revocable trust, an irrevocable trust cannot be altered or dissolved without the consent of the beneficiaries. Once you place assets in this trust, you effectively remove them from your estate, which provides significant tax benefits. In Virginia and Maryland, irrevocable trusts can help with estate tax planning, as the assets no longer count toward your taxable estate.
Additionally, irrevocable trusts offer stronger protection from creditors. Because you give up control over the assets, creditors generally cannot claim them, and they are not considered part of your estate if you face lawsuits or bankruptcy.
Charitable and special needs trusts
Another option is a charitable trust, which benefits a specific charity or group. If you wish to leave part of your estate to a cause, this type of trust allows you to do so while also offering tax deductions. Similarly, a special needs trust helps provide for a loved one with disabilities without affecting their eligibility for government benefits.
Understanding your options
Selecting the right trust depends on your goals. Revocable and irrevocable trusts each offer unique advantages depending on how much control and protection you want over your assets.