Two big pillars of estate planning are wills and living trusts. Most people are familiar with the concept of a will: it is a document that can act as a guide for distributing assets or making arrangements after one’s death. For instance, you can use a will to ensure that any minor children under your protection go to a guardian of your choosing if you die.
Most people are less familiar with living trusts. According to Experian, you can choose between two varieties of living trust: revocable and irrevocable.
What is a revocable living trust?
You can change this type of trust as many times as you would like before your death. When you are alive, you transfer assets into the trust. These assets remain your property until you die. After your death, the person you designate as successor will control the distribution of assets in the trust.
A revocable living trust will not protect your assets from creditors or estate taxes since the assets in the trust still legally are your property. A revocable living trust is a good choice if you are mainly concerned with helping your beneficiaries avoid probate.
What is an irrevocable trust?
Once you sign an irrevocable living trust, you cannot change anything about it. Everything that you put into the trust then becomes the legal property of the trust. With an irrevocable trust, the trust protects the assets inside from creditors and the IRS.
However, if the law discovers that you created an irrevocable living trust in order to avoid your creditors or the IRS, it is possible the law will subject you to penalties.