The majority of Americans understand what a will is, at least in concept, but many people are not nearly as familiar with living trusts. Living trusts may be important components of estate or long-term care plans.
There are two main types of living trusts — revocable and irrevocable. According to Experian, revocable trusts may be good for asset management and may help your heirs avoid probate while irrevocable trusts may be good for asset protection for long-term care.
What is a revocable trust?
A revocable trust is created and funded during your lifetime. You may change or amend a revocable trust as much as you like while you are alive. Likewise, anything that you put inside of a revocable trust stays as your personal property until death. At this point, the trust becomes irrevocable since you are no longer alive to change it, and anything that you title in the name of the trust prior to death will be controlled by the terms of the trust. Since the trust controls how your assets are distributed, it may be possible to avoid probate on those assets. Revocable trusts are very popular for real estate, particularly if you own real estate in multiple states.
What is an irrevocable trust?
Once you create an irrevocable trust, you cannot change the terms of it or get your assets back. Additionally, anything that you put inside of an irrevocable trust belongs to the trust itself and is no longer your property legally. This is why irrevocable trusts can help to protect your assets from having to pay for your long-term care, provided that the assets have been in the trust for more than five (5) years. An irrevocable trust may also protect your assets from creditors. However, if the courts find out that you created an irrevocable trust with the purpose of defrauding creditors you may face legal penalties.