Many Americans know how a final will and testament functions, even if they do not have one. However, many people are completely unaware of living trusts and the role they can play in an estate plan.
There are two main varieties of living trust. According to Experian, these are revocable and irrevocable trusts.
What can a revocable trust do?
With a revocable trust, you can change it as much as you like before death. Anything that you put into a revocable trust remains your personal property until you die. Essentially, the way a revocable trust works is quite similar to a will.
The main reason to use a revocable trust is to avoid probate after you die. Anything that you put into a revocable trust will bypass probate, which means that your beneficiaries will have access to their inheritance much sooner than if you named the asset in question in a will.
What can an irrevocable trust do?
With an irrevocable trust, anything that you place within it automatically becomes the property of the trust. You are also not able to modify an irrevocable trust once you create it. The main benefit of an irrevocable trust is that if you put your assets into it, the government will not be able to subject those assets to estate tax after your death in most cases.
Anything that you put into an irrevocable trust also gains protection from creditors as the assets are no longer your direct property. However, if the government finds that you created an irrevocable trust to avoid creditors, there can be legal penalties for this. Irrevocable and revocable trusts are extremely powerful cornerstones in any comprehensive estate plan.