Having a comprehensive estate plan is paramount for ensuring that your assets get passed on to your beneficiaries in a timely manner after your death. Many people are familiar with the role a will can play in this process, but living trusts can help you disseminate your assets faster and potentially protect them from estate taxes.
Living trusts come in two main varieties: revocable and irrevocable. According to Experian, a revocable living trust can help you avoid probate while an irrevocable living trust can help you avoid estate taxes.
How can I avoid probate with a revocable living trust?
The word revocable means “to take back.” With a revocable living trust, you can choose to change the terms of the living trust until the day you die. Additionally, anything that you place into the trust remains your property.
Since assets in a revocable living trust are still your property, your estate pays taxes on these assets after your death. Anything that you place into a revocable living trust can go straight to your named beneficiaries: nothing will go through probate. In this case, a revocable living trust can save your descendants months or years in probate court.
How can I avoid estate taxes with an irrevocable living trust?
On the other hand, you cannot make any changes to an irrevocable living trust once you have signed the paperwork. Additionally, any assets that you put into an irrevocable living trust become the legal property of the trust rather than your legal property.
The benefit of this is that the government cannot subject anything you place into the irrevocable living trust to estate taxes.