Trusts come in two main flavors, each serving a different purpose.
Revocable Trusts
You retain full control and can change or cancel the trust at any time. The income is taxed to you personally. The main purpose is probate avoidance and incapacity planning. It does NOT protect assets from creditors or estate taxes (beyond the standard credit planning).
Irrevocable Trusts
Once created, you generally cannot change it or get your assets back. Why do it?
- Asset Protection: Assets are no longer yours, so creditors can't easily reach them.
- Estate Tax Reduction: "Life Insurance Trusts" (ILITs) remove the death benefit from your taxable estate.
- Charitable Giving: Charitable Remainder Trusts provide income to you for life and a deduction, with the remainder going to charity.