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Living Trust: What Is It & Do You Need One? | Full Guide

When most people hear the words “trust account,” they immediately think about the super rich. However, trusts are not just for rich people! Living trusts can be extremely useful 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 all the details 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 allowing 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 a little more detail. First, 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 trust? It is basically a legal document that allows a trustee to manage assets for the beneficiaries.

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 individual 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.

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. You should review all your assets as well as your intended goals with your attorney. Your attorney can then draft the legal document for you to sign. Once the document is signed, the trust has been created. However, it still needs to be funded. A trust without any assets does no good for anyone.

To fund your trust, you simply need to transfer ownership of the specified property to the trust. This could be cash in bank accounts, real estate, automobiles, or any type of property that you might own. You as an individual no longer own the asset, rather the trust itself becomes the owner. The trust assets are then managed and distributed according to the terms of the trust. Once the trust is established and funded, it becomes a legal entity that must file tax returns and pay income tax. Some exceptions to that rule are grantor trusts. Depending on whether you choose a revocable or irrevocable trust, the taxes due might come from the trust assets or out of your own pocket. We will discuss that in more detail later in this article, and you may also research the IRS trust rules.

Once the trust is established, it can even be a named beneficiary on other types of accounts that would traditionally pass outside of probate. For instance, you might name your trust as the beneficiary of a life insurance policy. Similarly, you could name your trust as beneficiary of an IRA, 401(k), bank account, or any other account which you wish to become trust property at your time of death.

 

How Does A Living Trust Benefit My Estate Planning?

One of the biggest benefits a living trust can provide your estate plan is the fact 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 would be able to discover the manner in which your assets are distributed with a standard will. However, a trust is completely 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. If you suffer an incapacity, it does not affect the trust nor its provisions. If you have a trust, then it continues on just as it did before the incapacity. In addition, a living trust can provide many tax advantages. It is a powerful estate planning tool that can help reduce or eliminate estate taxes and gift taxes.

Finally, a living trust provides even more control over your assets than a typical will. Just like a will, a trust allows you to pass assets on to family members or friends after your death. However, a trust even allows 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.

 

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 your estate planning attorney today to determine whether a living trust is right for you.

 

Frequently Asked Questions

What are the advantages of a living trust?

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 record. 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 potentially save you thousands of dollars in estate taxes when done the right way. Particularly for larger estates, the tax advantages of a living trust can be substantial.

 

What are the disadvantages of a living trust?

One of the major disadvantages of a living trust is the cost. It can be costly to hire an attorney to draft a detailed trust agreement, and the on-going maintenance costs can be expensive as well. If you hire a third-party trustee, then they will charge on-going fees to manage the trust. In addition, you are still responsible for paying income taxes on the assets and profits of the trust from your personal assets in many cases. 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 appropriately transfer title of property into the name of the trust. With things like cash or bank accounts, the process is fairly 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 properly, you may lose some of the advantages of creating the trust in the first place.

 

What is the difference between a living trust and a will?

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 it only becomes effective upon your death. You can use a will to appoint a guardian for your minor children, while this is not something that you can accomplish with a trust. Nearly all transfer of property or distribution of assets that can be done with a will could also be accomplished through the proper use of a trust.

 

Do I need a living trust if I already have a will?

It depends on your specific financial situation. Even though you already have a will, you still may be able to benefit from the creation of a living trust. There are some major 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. In many cases, people have both a living trust and a will as part of their overall estate plan.

Elliot Marks

Elliot Marks

Elliot has spent years providing clear and concise information to help navigate the complex nuances of social security and many other government services in the United States. Elliot has a passion for helping those in need of these services to be able to find timely access to news and information that is relevant and helpful to their daily lives.