What Is a Living Trust?
A living trust is a legal contract or document created by an individual, also known as the trustor, settlor, or grantor. It outlines how the grantor’s assets should be managed and distributed after death.
The trustee, as designated by the trustor, is responsible for ensuring that the trust's property is managed and distributed following the trustor's wishes.
The trust is established to oversee the transfer of the trustor's or grantor's assets while avoiding the complex and costly legal procedure of probate.
How Do Living Trusts Work?
A living trust is a legal document outlining how your assets will be managed and distributed after death.
When you form a living trust, as the grantor, you can identify yourself as the initial trustee. This implies that you can preserve complete control of your property in the trust (or "trust corpus") until your death.
A trustee, who manages a living trust, has a fiduciary obligation to administer the trust responsibly in the best interests of the trust's beneficiary or beneficiaries selected by the trust grantor.
When the grantor dies, the assets are passed to the beneficiaries following the grantor's preferences as described in the trust agreement.
Types of Living Trusts
There are two main types of living trusts: revocable and irrevocable.
Revocable Living Trust
This trust is the most common and flexible type of living trust.
A revocable living trust can be modified or revoked at any time before the settlor's death. This means that the settlor can change the terms of the trust, add or remove assets from the trust, and even dissolve the trust entirely if they so choose.
The trust allows the settlor to name himself or herself as trustee and seize control of the trust's assets.
However, because the assets in the trust remain part of the trust settlor's estate, the individual may still be liable for estate taxes if the estate exceeds the estate tax exemption at the time of death.
Your trust will become irrevocable after your death, meaning it cannot be terminated or amended. Your successor must then follow the directions in the Declaration of Trust for dispersing your trust's assets.
Irrevocable Living Trust
An irrevocable living trust is a type of trust that cannot be modified or revoked after it has been created.
This means that once the trust is formed, the settlor cannot make changes to the trust agreement, add or remove assets from the trust, or dissolve the trust entirely.
Generally, changes to the provisions of an irrevocable trust require either an agreement signed by the trustee and all of the trust's beneficiaries or a judge's ruling.
Since the trust is irrevocable, the settlor gives up some control over the assets placed in the trust. This can have significant tax implications because the assets in the trust are no longer considered part of the settlor's estate.
This means irrevocable trusts may be more advantageous to persons whose estates exceed the federal estate tax exemption.
Living Trust vs. Will
Living trusts and wills work similarly in that both specify the beneficiaries that the grantors wish to inherit their assets when they die.
Creating a "pour-over will" alongside a living trust is a typical estate planning approach. It names the trustee of your living trust as your only beneficiary.
Then, any property that was not in the trust at the time of your death will be transferred to the trust and distributed following the terms of the trust agreement.
Without a will, the courts will divide non-trust property according to local intestacy rules, which may not be what you intend.
The following are the difference between a will and a living trust:
- Wills do not take effect until after you die. Thus, they cannot be used to control your assets before you die. On the other hand, a living trust can be used to manage your assets during your lifetime.
- Wills must go through probate, a legal process where the court appoints an executor to administer the estate and transfer assets to beneficiaries. Living trusts generally do not have to go through probate because the trust agreement specifies how the assets will be distributed.
- Wills are considered public documents as they undergo probate while living trusts can be private.
- If you have minor children, it is important to name a guardian in your will because, without one, the court will decide who takes care of them if something happens to you. However, in living trusts, you can name a successor trustee to take over the management of trust assets for the benefit of your children until they reach adulthood
A living trust may be the best estate planning option for you. However, there are significant advantages and disadvantages to establishing a living trust, which necessitates a careful assessment of whether a living trust is the best estate planning instrument for your particular circumstances.
Benefits of Living Trusts
The following benefits may make a living trust the best estate planning option for you:
Avoids Probate
One of the main advantages of a living trust is that it avoids probate. Probate is the legal process of administering a person's estate after death. During probate, the court will appoint an executor to oversee the estate and distribute the assets to the beneficiaries named in the deceased person's will.
If the deceased person did not have a will, the court would use state intestacy laws to determine how to distribute the assets. The probate process can be time-consuming and expensive, so avoiding probate is a major advantage of a living trust.
With living trusts, after your death, the assets held can be distributed immediately by your successor trustee. Because these assets are kept by your trust rather than your estate, they do not have to go through the probate procedure.
Provides for Owner’s Incapacity
If you become incapacitated, the successor trustee named in your trust will take over the management of your assets without having to apply to the courts for authorization.
With a will, on the other hand, your assets will be frozen until a court appoints a guardian or conservator to manage them. The process of appointing a guardian or conservator can be time-consuming, and it may be several months before your assets are available to pay for your care.
A living trust can also help you avoid the court-supervised guardianship or conservatorship process altogether. You can specify in your trust how you want your assets to be used for your care if you become incapacitated.
Control Over Distribution of Assets
When creating a living trust, you can specify how and when your assets will be distributed after your death. Furthermore, you are not required to immediately distribute the property to your beneficiaries.
For example, if you have young children, you can specify that they will receive their inheritance when they reach a certain age or until you believe they will be mature enough to handle their inheritance.
Drawbacks of Living Trusts
Although living trusts have several advantages, there are also some disadvantages you should be aware of, like the following:
No Real Tax Advantages
There is a common misconception that living trusts offer tax advantages. However, this is not the case. Living trusts are subject to the same taxes as regular trusts.
Even if a living trust controls the property you transfer to it, the income generated by these assets is still taxable. And, while a living trust may have certain estate tax advantages depending on how it is designed, the advantages are the same as those obtained by a will.
Additional Costs and Paperwork
Setting up a living trust requires additional paperwork and can be more expensive than setting up a will.
You will need to fund your trust by transferring ownership of your assets into the trust. This process, known as "funding" a trust, requires additional paperwork and can be costly if you have to change the title on your property or re-title your bank accounts.
If you have any title changes or more complicated assets, you should speak with an experienced estate planning attorney to transfer the title for you.
Hassle in Transfer of Title
While establishing the trust is not difficult, any assets you wish the trust to keep must be legally transferred to the trust.
Assets that do not need a transfer of titles, such as furniture or jewelry, can frequently be transferred using a document that transfers ownership rights.
However, for assets to which you possess the title, such as real estate, a formal change of ownership of title must be made to the title document itself.
How to Set up a Living Trust
If you have a complicated estate or many issues, you should consult an estate planning attorney about establishing a living trust.
However, if your estate is modest and straightforward, and you do not have complicated family dynamics, you may construct a self-help living trust online. The majority of these internet services charge a fee.
Before you begin, you need to make the following decisions:
- Whether you wish to set up a living trust in addition to a pour-over will?
- Who do you want to be your replacement trustee?
- Which assets do you wish to place in your trust?
- Who do you want to inherit your property once you die?
You must sign and execute your living trust paperwork after completing them online or with an attorney. Your paperwork may need to be notarized, depending on where you live.
Then you must physically transfer your property to the trust. For example, if your home is part of the trust, you'll need to amend the deed to indicate that the trustee owns the residence.
Moreover, as you continue to acquire property, remember that you must either acquire it in your role as trustee of the trust (rather than in your personal capacity) or transfer the property to the trust later by deed or assignment.
Final Thoughts
A living trust is a legal arrangement that allows you to transfer your property to a trustee, who then manages the property for the benefit of your designated beneficiaries.
Living trusts can be revocable or irrevocable, offering several advantages over wills, including avoiding probate and providing for your incapacity.
Living trusts also have some drawbacks, including the hassle of transferring title to your assets and the lack of real tax advantages.
If you are considering setting up a living trust, consult an experienced estate planning attorney to ensure it is right for you.
FAQs
1) What is a living trust?
A living trust is a legal arrangement that allows you to transfer your property to a trustee, who then manages the property for the benefit of your designated beneficiaries.
2) How do living trusts work?
A living trust is a legal document that specifies how your assets will be handled and distributed following your death. The trustee has a fiduciary duty to administer the trust responsibly and in the best interests of the beneficiary or beneficiaries designated by the trust's grantor.
When the grantor passes away, the assets are distributed among the beneficiaries following the trust agreements.
3) What are the different types of living trusts?
There are several different types of living trusts, including revocable and irrevocable trusts.
4) What are the benefits of living trusts?
Some of the benefits of living trusts include avoiding probate, providing for your incapacity, and controlling the distribution of your assets.
5) What are the drawbacks of living trusts?
Living trusts' drawbacks include the hassle of transferring title to your assets and the lack of real tax advantages.
