A living trust is a legal arrangement that allows you to hold your property in trust and thus avoid probate if you die. Probate can be an expensive, time-consuming process that delays the transfer of your property to your beneficiaries, and living trusts are designed to avoid this and other inconveniences. In this guide, we’ll help you understand what living trusts are, how they work, and whether you should create one—or ask an attorney to do it for you. Let’s get started!
What Is A Living Trust?
A living trust — also known as revocable trust — is a legal instrument that permits the property owner to transfer ownership of the property to a trust—but keep the right to govern it during their lifetime.
A living trust is established by a written document that is signed by the individual who established it and signed by a notary public, establishing the legal entity into which the donor (also called the grantor) can transfer assets.
In the living trust document, you will also find that a trustee (the person who will manage assets within the trust) and beneficiary (the individual who will benefit from the trust when the grantor passes away) are also listed.
The living trust retains control of a trust during the grantor’s lifetime but permits ownership to pass on to the ultimate beneficiary (the child in our previous example) once the grantor dies.
As well as creating trusts during and after an individual’s lifetime, grantors may devise revocable trusts that may be amended, terminated, or modified at any time over the lifetime of the grantor. During the grant period, the grantor remains the owner of the trust’s assets. A trust document can specify a successor trustee, as well as instructions regarding how assets should be managed and transferred after the death or incapacity of a trustee. A revocable trust does not have to go through probate. It is only if the grantor passes away, but if he or she remains alive, then it’s just one of the grantor’s taxable assets.
The InnerWorkings Of A Living Trust
The purpose of a revocable or living trust is to establish a legal entity (similar to a virtual holding company) into which you can transfer the ownership of assets before transferring them to the next owner. You can also specify the terms and conditions under which these assets may be used and controlled. Before establishing one, you should meet with an attorney to determine whether it’s the best vehicle for helping you achieve your goals.
A living trust is iffy because a lawyer will need to help you create the trust, and then transfer your assets (such as homes, condos, apartments, and other real estate investments) into the trust’s ownership. When property is involved, that means needing to transfer the property title to the trust. Like in a will, a grantor in a trust needs to designate a trustee who can watch over and make decisions on behalf of the trust but can also appoint themselves to this position.
Key Features Of A Living Trust
There are several reasons to consider setting up and maintaining a living trust for the benefit of those dear to you. Here are a few of them.
Revocable Trusts Can Help Avoid Probate
Most people choose to create a living trust to avoid probate after their death. A living trust is not just easier and cheaper, but faster as well. Given this point, most grantors opt for a living trust in order to avoid going through probate and in the process save their heirs from the frustration of such a thing.
Need Privacy? Living Trusts Can Help With That
Since court records are public, it’s not uncommon for the probate process to unearth sensitive information about the individual’s debts, his or her obligations to people who have loaned money, and so on. Moreover, there is a process whereby heirs are entitled to inspect court records and to get information about the estate and its beneficiaries that those individuals might not have wanted the heirs to know. Having a living trust enables you to avoid having to go through probate proceedings, so it can make your life a little easier by preserving your privacy.
Revocable Trusts Can Provide Flexibility
Grantors, over the course of their lives, may wish to alter the terms of the trust and regain control over donated assets. Under a living trust, this is an easy process. Living trusts can have their assets or beneficiaries changed at any time during a beneficiary’s lifetime.
Assists With Concerns Of Minors And Dependents
Providing for loved ones with revocable trusts is a way for grantors to tailor trust terms to their needs. For example, many grantors may be concerned about adult children who have financial problems or addictions. A grantor may put conditions on the use or sale of trust assets. A grantor can name guardians for minor children or disabled dependents in his or her will as well as a person who will care for them.
Provides For The Management Of Assets In Case Of Disability Of A Grantor
The trustee can help with the grantor’s personal affairs (if he or she is disabled or unable to take care of his or her own affairs). This also provides a layer of protection to the grantor in the event of incapacity. By naming a co-trustee, a successor trustee, or even yourself, you can provide an intermediary in the event that you become incapacitated and cannot look after your affairs. By doing this, you are in a position to act as trustee for the living trust for as long as you can and when appropriate, you can make arrangements to have someone else serve as successor trustee.
The Drawbacks Of A Living Trust
As with any legal decision, a living trust has both positives and negatives, and there are limitations to what it can accomplish. A revocable trust is one of the best ways to achieve these goals, so be sure to consult an elder law attorney before making a decision.
A Living Trust Won’t Insure Against Losing Your Assets
A revocable trust does not shield your assets from being seized and applied to offset nursing home costs when you apply for Medicaid, which is your safety net should you have any illness that requires treatment in a nursing home. As you age and changes in your condition occur, keep in mind the potential costs to you and build them into your financial planning.
You Won’t Be Able To Reduce Or Avoid Estate Taxes
If you’re hoping to save a little money on estate taxes, you’re out of luck. The grantor’s assets are considered part of their estate as long as the grantor retains control over them.
There Won’t Be An Immediate Reduction In Legal Costs
Having an estate attorney prepare the paperwork to help you set up a living trust and then transfer assets into it may be a worthwhile investment from the long-term perspective, but it will be an added expense upfront.
You Won’t Let You Off The Hook For Making Difficult Decisions
There will still be times of disagreements and debating as to who will get what, as well as where to invest. Likewise, you’ll need to spend some time compiling documents and detailed notes.
The Difference Between A Will And A Living Trust
A will is a document that will guide the way that your assets are to be dispersed to your beneficiaries. A will can also contain your wishes for post-death matters, like the designation of an executor and a guardian for your children. It may also contain instructions for your funeral and burial. When a will tells the executor to create a trust, he or she can appoint a trustee to oversee all of the deceased’s assets and decide how to handle them.
State law requires a will to be signed and witnessed, and that it be implemented legally. Execution must be filed and supervised by your designated executor with the probate court within your jurisdiction. The document is publicly accessible in the probate court records. The council supervises its implementation and has jurisdiction over disputes.
A trust is a legal arrangement that makes the subject of the trust independent of the rest of the estate after death. While a will takes effect after death, a trust may be used to effect changes before and after the owner’s death. Either on their own or in combination, wills and trusts can fulfill the function of sound estate planning.
Final Remarks: A Living Trust May Be An Important Tool For Estate Planning
A living trust is a legal document that allows you to control how your assets will be managed and distributed after your death. Unlike a will, a living trust does not go through probate, which can be time-consuming and expensive. Additionally, a living trust can provide more flexibility than a will in terms of asset distribution. For example, a will typically only allows for the distribution of assets that are owned outright by the person who created the will. A living trust, on the other hand, can be used to distribute both assets that are owned outright as well as those that are held in joint ownership or in trusts.
