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A living trust is a legal document that can help simplify distributing your assets when you pass away. With a living trust, a trustee manages your assets according to your wishes. Upon your death, your assets will be released to your beneficiaries according to instructions outlined in the trust document.
One of the biggest benefits of a trust is that unlike a will, a trust allows you to bypass the costly and time-consuming probate process. But there are more benefits a living trust offers. Here's what you need to know about living trusts and whether they should be a part of your estate planning process.
How a Living Trust Works
The person who creates a living trust is known as the grantor (also called a settlor or trustor). Those who eventually receive income or other distributions from the trust are the beneficiaries.
When you set up a trust, you'll designate a trustee to administer and manage the assets in the trust for the sake of your beneficiaries, usually family members. Typically you and/or your spouse act as trustees while you're alive, and you choose a successor, such as an adult child, relative, financial advisor or other party, to act as trustee after you die or become incapacitated. The successor trustee has no control over how your assets are allocated; it's simply their job to ensure your wishes are carried out.
With certain kinds of living trusts, you can make changes or amend it as needed. Major life events like marriage, divorce, having or adopting children, acquiring new possessions or moving to another state are reasons to amend your trust.
A trust doesn't help you avoid income or gift taxes, except in some cases when transferring assets between spouses. But while it lacks significant tax benefits, it makes up in other areas, like privacy and the flexibility to convey specific instructions for asset distribution.
A living trust can either be revocable or irrevocable:
- Revocable trust: In a revocable trust, you have the power to revoke or amend it at any time. You reserve the right to change the beneficiaries, name another trustee, change the termination date, or even revoke the trust and title of the property back to your name. You can write an amendment to the trust and have it notarized, or you can do a restatement of trust to incorporate any changes.
- Irrevocable trust: An irrevocable trust is a living trust that can't be revoked or amended, except under certain legal conditions. It requires you to give up ownership rights to the assets in the trust, so committing to an irrevocable trust requires careful consideration. But there are certain benefits that a revocable trust doesn't have. For example, since the assets are no longer yours, that part of the estate likely will not be subject to estate taxes. (Estate taxes currently only affect those with assets totalling about $12 million or more, so this may not be a concern for most people.) An irrevocable trust can also protect your estate from creditors and qualify you for government benefits, which you can't get with a revocable trust.
When you establish the trust, you must retitle your assets in the name of the trust. For instance, real estate is a perfect use for a living trust and it is quite simple to transfer and protect. Typically, you'll use a quit claim deed to transfer your property into the trust. You can also place business holdings like an LLC into your trust along with vehicles, bank accounts, insurance policies and other personal property.
Because trusts may not include all your assets and also don't include important additional information about your wishes, you typically still need to draw up a will even if you have a living trust. For example, a trust does not include information about who will act as a guardian for your minor-age children should you die; you'll need a will for that. Also, any property you don't place in the trust will go through the probate process, in which a probate court verifies the authenticity of the will. If there's anything you don't put into your trust, you can create what is called a pour-over will that transfers assets into your trust after death, though the probate court will still handle the transfer.
Benefits of a Living Trust
The benefits of a living trust include:
- Simplicity: By bypassing the probate process, a living trust makes the distribution of assets more efficient than having a will alone.
- Greater control: Unlike a will, a living trust allows you to stipulate not just how much your heirs will receive, but when and how they'll receive their inheritance. For example, you can have a certain amount of money released each year or every five years.
- Privacy: Unlike probate documents, the details of your trust are kept private in a way that a will does not allow.
- Dependability: A living trust can manage your assets in the event you become incapacitated. This helps you avoid conservatorship, which is when a court decides you are incapable of making financial decisions and appoints someone to handle your affairs.
- Protection: In some cases, you can use a living trust to protect money you owe to creditors. With an irrevocable trust, the property is no longer yours, so a creditor can't force you to close the trust to cover an amount due.
Drawbacks of a Living Trust
Some drawbacks to having a living trust include:
- Costs: Depending on your location, it could cost upwards of $1,000 to have an estate planning attorney draft, maintain and update a living trust. Drafting a will costs significantly less, and you can draw up a will yourself to save even more money.
- Inflexibility: Some financial maneuvers may be difficult while your assets are in a trust. For instance, borrowing against a home or a 401(k) may require you to move your property out of the trust first.
- Retitling assets: You will need to retitle your property and belongings to place them in your living trust. Retitling involves taking out a new deed reflecting the name of the trust, which must be executed and notarized with your county reporter.
Should You Get a Living Trust?
A living trust is not just for high-net-worth individuals. The reasons a living trust might be a good fit for you include:
- You have assets in different states or countries.
- You want to provide for minor or disabled beneficiaries.
- You have specific desires and instructions for when beneficiaries should receive distributions. For instance, you might want your child to receive distributions after college or when they become a parent.
- You want to protect assets from divorce or remarriage.
- You are concerned about illness or injury and would like a trustee to step in and manage your financial affairs if you can't.
Creating a living trust typically requires the help of a lawyer and possibly a financial professional who understands your financial circumstances. But the investment could be worth it to make the administration and distribution of your estate easier for your loved ones.
How to Set Up a Living Trust
Once you connect with the estate planning lawyer who will draft your living trust, you'll follow these steps:
- Decide which kind of trust you want.
- Know what assets you'll put in the trust.
- Name your beneficiaries.
- Identify the current and successor trustee(s).
- Designate a money manager (likely needed if assets will be passed to a minor).
- Prepare the trust.
- Transfer property ownership to the trust.
- Update the trust as necessary, such as after major life events.
The Bottom Line
A living trust is an estate planning tool that can help simplify distributing your assets once you're gone. Simple circumstances like owning real estate in multiple jurisdictions or remarriage can be enough to trigger the need for a living trust. Consider speaking with a knowledgeable estate planning attorney and financial professional who can help you create an estate plan appropriate for your family and financial circumstances.