As trusts are becoming one of the most preferred means of passing on and preserving wealth, most Americans should know the difference between a revocable trust and irrevocable trust.
On the most basic level, the difference between these two legal documents or instruments is control of the trust's assets.
Here's a quick overview of what you need to know:
A revocable trust is more commonly known as a living trust. This legal instrument is created during a person's life and is used to hold things like real property, business assets, and investments for the benefit of that person and his or her family.
What makes this trust "revocable" is that the person who creates the trust (the "grantor") can dissolve the trust at any point during his or her life.
As CNBC's Suze Orman likes to point out, "[e]veryone needs a living revocable trust," to ensure not only that one's assets are protected after death but also to protect those assets during life.
Business owners can also place their current businesses in revocable trusts, but it will not protect that business from creditors. In addition, larger trusts may require paying a third party trustee to manage a revocable trust's assets and its tax burdens.
A simple "pourover will" can ensure that any leftover assets not already in a revocable trust are transferred in, once that person dies.
An irrevocable trust cannot be altered or dissolved after its creation without the permission of the trustee (the one responsible for the trust's assets) and all of the beneficiaries (the ones who receive support and money from the trust).
Many estate planners will suggest that a person create an irrevocable trust upon his or her death in order to make sure that the deceased's loved ones are taken care of.
The difficulty in changing or destroying the trust can ensure that misguided beneficiaries don't fight over or burn through limited trust funds, and the funds in the trust will be protected from the beneficiaries' creditors.
In the event that a person creates a living revocable trust and dies, then that trust will become an irrevocable trust.
No one likes to imagine his or her own demise, but planning for the future may involve either a revocable or irrevocable trust, in addition to a will. If you're still unsure which trust is right for you, consult with an experience estate planning attorney in your area.