A living trust is a legal document that designates a person, also known as a trustee, to manage and make decisions for the benefit of the beneficiaries. These are created during an individual’s lifetime where they designate someone to manage their assets. This is done while they are still alive as a way to make a smoother transition after their death.
The trustee has the fiduciary responsibility to decide what to do with assets. It must be in the best interest of the eventual beneficiaries. This allows for an easy transfer of the trusts assets to the beneficiaries. Meanwhile, you get to avoid probate proceedings.
How Do Living Trusts Work?
With a living trust, the originator (or trustor) assigns a trustee to manage their assets. This happens while the trustor is still alive.
- Way to manage your assets while you are alive. Make a smoother transition after your death for the surviving beneficiaries
- “Funding the trust” — remove your name off of bank accounts, investments, properties and put them in the name of the trust. This can also be done with vehicles, insurance policies, etc.
- A trustee is assigned in order to perform the instructions of the trust. This person could be a relative, or professional (from a financial institution perhaps)
How To Start a Living Trust
There are several important things to consider when starting a trust. Some of the steps you should work through as you create a living trust are as follows:
- Determine which type of trust is right for you
- Take inventory of all assets and property
- Gather all of the necessary paperwork
- Designate beneficiaries of the trust
- Assign a trustee to oversee or manage the trust
- Enlist the help of a financial advisor or estate planner attorney
Benefits of Living Trusts
A living trust is a great way to help you manage your estate while you are living. It can provide privacy, flexibility and help protect your assets while you are alive. The benefits that a living trust provides are as follows:
Provides Privacy Protection
A living trust is not public information, as say, a will is. It is private information that only the trustee has access to. Upon death, the assets are distributed to the beneficiaries without being exposed to the public.
Flexibility
Depending on which type of living trust you have, you may be able to make modifications or updates. You are allowed to make alterations at any time with a revocable trust.
If something happens in your life and you need to make a change, you are allowed to do so. You can update asset allocation, or beneficiaries, amongst other things to your discretion if you are the trustee for your account. A revocable trust is a popular choice for those starting out estate planning given this additional flexibility.
Avoid Probate Process
With a living trust you can circumnavigate the probate court process. This allows you to have the trustee pass assets on to the beneficiaries without having to wait for a court order. Since the asset transactions will not enter the public record through the probate courts, you get the additional privacy benefit.
Reasons To Avoid Probate:
- Probate can be a lengthy process and may take months to settle
- The beneficiaries inheritance will take a hit due to probate fees
- Your information is on the public record when the probate court is involved. This includes notifying creditors of your death, assets you own, who your beneficiaries are, etc.
Revocable vs Irrevocable Living Trusts
A living trust can be either a revocable, or an irrevocable trust. There are different types of trusts, but they are all either one of these types. What is the difference between the two though?
Revocable Trusts are the more common types of trusts. It is an estate planning tool that can be updated, modified or downright revoked at any point in time by the trustor. Revocable Trusts provide you with:
- Flexibility to modify as necessary
- Follow wishes of the trustor at all times (since changes can be made while you are living)
- Allow you to avoid probate court
- Assets are Federally insured (dependent upon certain conditions)
Irrevocable Trusts are an estate planning tool that cannot be modified without the consent of the beneficiaries. Once you have put assets in an irrevocable trust, they are essentially not yours anymore. Technically, assets are now property of the beneficiaries. Not all is bad though, irrevocable trusts provide you with:
- Ability to remove taxable assets from your property. This allows you to take advantage of the estate tax exemption
- Ability to improve your current tax situation by removing assets from your estate
- Can control your assets after your death if you suspect the funds will be misused by the beneficiaries
Important Note: A revocable trust becomes an irrevocable trust upon death of the originator of the trust.
Living Trust vs Will
A will is a legal document that describes who will get your assets at the time of your death. Without this document, the probate court system will get to decide where the assets will go. This could potentially leave your loved ones in limbo with regards to how your estate will be allocated. Having one established could ease unnecessary anxiety.
One of the main benefits of a will that a trust cannot cover, is the guardianship of a minor child. This cannot be included in a trust. It must be outlined in your will if you wish to keep that type of decision out of the courts.
Wills allow you to organize and identify where your family heirlooms, furniture, pets, jewelry, etc. go to. In other words, if you have a simple asset distribution, a will may be all you require.
A Living Trust is more of a high level asset management tool within estate planning. Living trusts are more complex and harder to set up in addition. This is especially the case with irrevocable trusts. If you have a larger suite of assets and property, a living will is essential in addition to your will.
Final Thoughts: Start Planning Your Estate
Setting up a living trust is a fairly simple method to protect your assets as well as your heirs. They can cost a bit more than a will to establish, but it may be well worth it in the end. Your privacy is protected. Your family is secured. All of which happens while you are still alive. A living trust may be in your best interest, contact a financial advisor to talk through all of your options.
