Living trusts vs. testamentary trusts
All trusts are set up by you, the grantor, during your life. However, not all trusts immediately go into effect. Depending on when the trust becomes effective, it is either a living trust or a testamentary trust.
Living trusts: When a trust is created and then immediately become effective, it is known as a “living trust.”
Testamentary trusts: When a trust is created and then does not become effective until after your death, it is known as a “testamentary trust.” In the case of testamentary trusts, you, as the person creating the trust, are called the “testator.” Testamentary trusts are often created within wills.
Revocable trusts vs. irrevocable trusts
All trusts are either revocable or irrevocable.
Irrevocable trusts: You give ownership and control of the property in the trust to others (trustees) and therefore no longer own or control the property, thus making you unable to enact changes to the the trust.
Tax implications during your life
With a revocable trust you are still treated as the owner of the property in the trust, and can therefore be taxed on that property during your life. With an irrevocable trust, you give up ownership of the property in the trust and are therefore no longer liable for that property and cannot be taxed on that property.
Reasons for choosing a revocable trust vs. an irrevocable trust
Depending on the goals of the trust that you’re establishing, there may be some benefits to creating either a revocable trust or an irrevocable trust. For example, if the primary goal of the trust is to avoid excessive estate taxes, you will likely want to set up an irrevocable trust, as you would not pay taxes on property held in an irrevocable trust. However, if the primary goal of the trust is to maintain control of assets in the event of incompetence, you will likely want to set up a revocable trust, as you will retain control over the assets in the trust and the beneficiaries of that trust until you die. In addition, the rules of the particular trust that you’re establishing may dictate whether a trust must be revocable or irrevocable. If you’re unsure whether you want to establish a revocable or irrevocable trust, you should consult a licensed trusts and estates attorney in your state.