The majority of Americans are familiar with the concept of a will. However, many estate plans benefit from living trusts, as well. Understanding the potential role a living trust can play in your estate planning process can help you make the best decisions for your assets and your heirs.
In many ways, trusts are similar to wills. However, with living trusts, your assets go directly to your heirs without probate. According to Experian, the two main varieties of living trusts are revocable and irrevocable.
What are revocable trusts?
If you have a revocable trust, this means that you can make as many edits to the trust itself until you die. When you are alive, anything that is in a revocable trust remains your personal property. After your death, the law considers any assets as part of your estate.
The main benefit of a revocable trust is that it allows your heirs to avoid probate court. Since everything in the trust remains your personal property, the government will still tax these assets since they are part of your estate.
What are irrevocable trusts?
After you create an irrevocable trust, anything in it becomes the property of the trust rather than your personal property. You cannot change the terms of an irrevocable trust after you create it. This means that after your death, the government will not consider anything in the trust as part of your personal assets and will not assess estate taxes.
A solid understanding of trusts can help you best arrange your assets for your heirs, whether you are looking to avoid probate, taxes or both.