How do I decide which type of trust to use?
Two basic kinds of trust exist: revocable and irrevocable. Revocable trusts can be changed
or even canceled any time after they are established. For this reason, they do not remove
assets from a grantor's estate; the government considers those assets as being under the
grantor's control. With a revocable trust, you must pay income taxes on revenue generated
by the trust and those assets remaining at your death may be subject to estate taxes. Be
absolutely sure of your decision before going ahead with an irrevocable trust. Irrevocable
trusts cannot be altered or canceled once they are established. The assets placed into an
irrevocable trust are permanently removed from your estate and transferred to the trust.
The trust becomes a separate taxable entity that pays taxes on the income and capital
gains it generates. Therefore, when you die, the appreciation of those assets is not
considered part of your estate and thus avoids estate taxes.