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Understanding the purpose of living trusts

On Behalf of | Apr 7, 2021 | Estate Planning & Probate

Even though the majority of Americans know what a will is, most are far less familiar with the power of living trusts. In reality, most Americans could benefit from using a living trust as a cornerstone of their estate plan, just like a will is.

The two main varieties of living trust are revocable and irrevocable. Which one is right for you depends on your needs. However, generally speaking, revocable living trusts are good for avoiding probate, while irrevocable ones are best for avoiding estate taxes.

The revocable trust

Revocable living trusts are the most flexible variety of living trust. You can change the terms of the trust at any point you desire, so long as you are alive. When you die, anything inside the living trust will go to your beneficiaries. In this way, living trusts are very similar to wills.

The main role of a revocable trust is to help your heirs avoid probate. Anything that is in a living will does not need to go through probate, which can save your heirs a lot of money and time.

The irrevocable trust

Irrevocable trusts are more strict. Anything that you place into an irrevocable trust must stay in the trust and, in fact, becomes the legal property of the trust. You can make no changes to an irrevocable trust once you have created it.

Irrevocable trusts are good for helping your heirs avoid estate tax. In fact, creditors also cannot go after anything that is in an irrevocable trust. Of course, if the government finds that you created an irrevocable trust for fraudulent purposes, this comes with heavy penalties attached.