Many Americans are familiar with what a will does in an estate plan, but are less familiar with the role of living trusts. Living trusts have a number of advantages over wills in certain applications, including the fact that anything in a living trust bypasses probate.
There are two distinct kinds of living trust, and which ones you choose to make a part of your estate plan depends on your needs and wants. The two types of living trust, according to Experian, are revocable and irrevocable.
What is a revocable trust?
With a revocable trust, you can make as many changes to it as you like as long as you are alive. Anything that you put into a revocable trust remains your personal property until your death. Once you die, the successor trustee can then distribute the assets within it according to your wishes.
The main purpose of a revocable trust is so that the assets inside it avoid probate court. Revocable trusts do not reduce estate taxes.
What is an irrevocable trust?
With an irrevocable trust, anything that you put inside of it becomes the property of the trust. You are not able to make any changes to an irrevocable trust after you sign the paperwork. Since the assets no longer belong to you, the government will not subject anything inside of an irrevocable trust to estate taxes.
The process of deciding how best to pass down your assets can be a complex one. For most individuals, a combination of wills and living trusts is a wise way to finesse estate planning.