When most people hear “trust account,” they immediately think about the super-rich.
However, a trusts is not just for rich people! Living trusts can be handy tools to help you accomplish your estate planning goals.
They provide many benefits, like tax savings and probate avoidance. Whether or not you can benefit from a living trust depends on your financial situation and what goals you intend to accomplish.
Keep reading to learn about living trusts, including how they work, how to establish one, and what benefits you can reap.
What Is A Living Trust?
A living trust is a type of trust created during the grantor’s lifetime. It allows a trustee to manage the assets in the trust for the benefit of the beneficiary.
That statement is quite a mouthful, so we will break things down into more detail.
- Pay attention to the word “living.” This means that the grantor or settlor creates the trust during their lifetime.
- A settlor or grantor is simply the person who creates the trust and places assets into the trust.
- This is in contrast to a testamentary trust or estate trust, which is created after the grantor’s death through provisions in his or her will.
So, what is a living trust?
- It is a legal document that allows a trustee to manage beneficiary assets.
- A living trust allows the grantor to easily pass assets or property to designated beneficiaries without going through the lengthy and complicated probate process.
- Often, the grantor, trustee, and beneficiary are all the same individuals during the grantor’s lifetime.
- The provisions of the trust then govern what happens upon the death of the trustee.
- A successor trustee would be named in the trust documents, and that person would then manage or distribute the remaining assets per the provisions of the trust agreement.
Living trusts offer many advantages, although they do have a few drawbacks as well.
KEY TAKEAWAYS
- Living trusts can be either revocable or irrevocable, and each option has different benefits and drawbacks.
- A living trust provides more control over your assets than a typical will; you can avoid probate and usually reduce your taxes.
- Often, the grantor (person who establishes the trust), the trustee (person who manages the trust), and the beneficiary are all the same person during the grantor’s lifetime.
How To Establish And Fund A Living Trust
Establishing a living trust is not extremely difficult, although you will usually need to rely on the expertise of an estate planning attorney to create the trust documents for you.
We will discuss that in more detail later in this article, and you may also research the IRS trust rules.
Must read articles related to Trusts
- Overview of “What is a trust?“.
- Deep dive into understanding irrevocable trusts.
- What are the differences between a revocable and irrevocable trust?
- How does a charitable remainder trust work?
- Learn about the differences between a living trust and a will.
How Does A Living Trust Benefit My Estate Planning?
One of the most significant benefits a living trust can provide your estate plan is that it allows you to avoid the legal process called probate.
With a typical last will, your entire estate must go through the probate court to be distributed according to the terms of your will. This process is time-consuming and complicated.
- Along those same lines, a living trust provides additional layers of privacy.
Probate court proceedings become part of the public record, so anyone can discover how your assets are distributed with a standard will.
- However, a trust is wholly private and shields the details of your estate from the public.
- Another advantage provided by a living trust is the fact that no conservatorship is needed should you become incapacitated.
It does not affect the trust or its provisions if you suffer an incapacity. If you have a trust, it continues just as before the incapacity.
- A living trust can provide many tax advantages. It is a powerful estate planning tool that can help reduce or eliminate estate and gift taxes.
- A living trust provides even more control over your assets than a typical will.
Like a will, a trust allows you to pass assets on to family members or friends after your death. However, a trust enable you to control how those beneficiaries will spend their inheritance. This reduces the risk that your loved ones might spend their entire inheritance on frivolous things like cars or vacations.
TIP
You may find it beneficial to create a will, a revocable trust, and an irrevocable trust. All three can form a robust estate planning strategy.
Revocable Living Trust vs Irrevocable Living Trust
There are two different types of living trusts – revocable and irrevocable.
The biggest difference between irrevocable and revocable trusts is evident in the names. Revocable living trusts can be revoked or changed at any time. On the other hand, irrevocable trusts cannot be revoked or changed once they are created. The only disclaimer to that is when all the beneficiaries agree to the change, then an irrevocable trust can be amended.
There are also some big differences to the way that these types of trusts are handled for tax purposes.
A revocable living trust gives the grantor great flexibility to change or amend the trust; however, it does not offer many of the tax advantages associated with irrevocable trusts. The grantor must still claim the assets of a revocable trust as part of his or her estate, and he or she maintains actual ownership of the property.
An irrevocable trust provides greater tax advantages, but the grantor must fully relinquish title to the assets over to the trustee. The trustee maintains a fiduciary relationship and must handle the assets specifically according to the terms of the trust.
The Bottom Line
Living trusts can be established according to your state law to help manage assets for minor children or as part of an overall estate plan.
These trusts can be used to avoid probate, save on taxes, and provide specific direction over how assets should be used.
While many people might think that trusts are only for the rich, that could not be farther from the truth. Though you might not consider yourself wealthy, you might still be able to benefit from a properly established trust.
Talk to an estate planning attorney to determine whether a living trust is right for you.
Frequently Asked Questions
One of the biggest advantages of a living trust comes from the fact that you can avoid the probate process after your death.
Your assets can be distributed to your beneficiaries more quickly, and trusts are not public records. This provides privacy for both your estate and your beneficiaries.
Going through probate creates a public record that would be available for anyone who makes the proper request to view.
A living trust also provides you additional control over how your beneficiaries use their inheritance.
Finally, a living trust can save you thousands of dollars in estate taxes when done correctly. Particularly for larger estates, the tax advantages of a living trust can be substantial.
One of the major disadvantages of a living trust is its cost. It can be costly to hire an attorney to draft a detailed trust agreement and to maintain it on an ongoing basis.
If you hire a third-party trustee, they will charge ongoing fees to manage the trust. In addition, in many cases, you are still responsible for paying income taxes on the assets and profits of the trust from your assets.
The property is still considered part of your estate, and you are responsible for paying the taxes – especially in a revocable living trust.
Lastly, it can be complicated to transfer property title into the trust’s name appropriately. The process for things like cash or bank accounts is relatively simple.
However, to transfer real estate to a trust, you must create a new deed and file it with your local probate court. That process causes you to incur additional costs, and if not done correctly, you may lose some of the advantages of creating the trust in the first place.
A living trust is created while you are still alive, and it becomes the owner of any property that you place into it.
However, a will is simply a document that provides for the distribution of your assets after your death.
A will is created during your lifetime but only becomes effective upon death. You can use a will to appoint a guardian for your minor children, but you cannot accomplish this with a trust.
Nearly all property transfers or asset distributions that can be made with a will could also be accomplished through the proper use of a trust.
It depends on your specific financial situation. Even if you already have a will, you may still be able to benefit from creating a living trust.
There are some significant differences between a living trust and a will. If you prefer to maintain privacy for your estate or want your beneficiaries to avoid the probate process, then a living trust can help you accomplish those goals.
When choosing a living trust vs a will, you do not have to pick just one. People often have a living trust and a will as part of their overall estate plan.
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