What is a Living Trust?
A Living Trust (not to be confused with a Living Will) is an estate planning legal document that is similar to a Will, but accomplishes more than just passing out your assets upon your death. Unlike a Will, a Living Trust is effective as soon as you sign it. A Will, on the other hand, is only effective after you pass away. This means that a Living Trust can contain instructions for what should happen to you and your assets should you become mentally disabled, and how your assets should be distributed when you pass away.
Here’s How the Living Trust Works
A Living Trust needs at least one trustee. The first trustee is typically the person making the trust. This person (or persons for a married couple) is called the “trustmaker”, “settlor”, “trustor”, or “grantor”.
The trustee (or trustees), is the person in charge of the Living Trust assets.
While you are alive and well, you are the trustee and the beneficiary of your Living Trust.
After your Living Trust is created, your assets are retitled from your name to the name of your Living Trust. Your Living Trust can also be set up to receive your estate assets such as your life insurance proceeds and your death benefits from your retirement accounts.
While you are alive and well (meaning you are not suffering from a mental disability), you are in full control of the assets in the Living Trust. You can revise or revoke your Living Trust at any time. Your Living Trust does not have to file a tax return or pay any income taxes. It is disregarded for tax purposes.
At Your Passing
At your passing, assets in your Living Trust are distributed to your loved ones according to your wishes.
As illustrated here, because the trust document, rather than a Will, owns your assets and directs how those assets will be distributed, you can avoid probate.
As you can see, your loved ones will receive their inheritances faster, and won’t have to pay all of the costs associated with probate.
This is especially helpful when you own real estate in more than one state, which necessitates a probate in each of those states.
Other Advantages of a Living Trust
One of the greatest benefits of a Living Trust is the ability to avoid probate. Probate costs can be effectively reduced or even eliminated by your Living Trust. Without a Living Trust, probate or some type of court administration is guaranteed. If all of your assets are in your Living Trust, your entire estate will avoid probate.
What’s more, by owning all of your assets in your Living Trust, you will make the administration of your estate easier for your loved ones and shorten the time they must wait to receive their inheritances. Probate can typically take 6 months to two (2) years to complete. Because you are avoiding probate, and the necessary court interference and costs that come with it, your loved ones won’t have to wait and they won’t have to pay the huge probate costs.
Another advantage to your Living Trust is that it can make it more difficult for anyone to challenge the administration of and distributions from your estate. Probating a Will guarantees an objectant the opportunity to be heard by the Court. If there is no Court, there is no forum in which a disgruntled beneficiary can complain about your estate.
Also, unlike a Will, which is effective only after you pass away, your Living Trust allows you to include instructions for someone else to manage your personal assets and needs if you ever suffer from a mental disability.
Your Living Trust is also an extremely flexible way to protect your loved ones from creditors, bankruptcy, divorce, etc. Your Living Trust can also protect the assets being left to your minor children and/or grandchildren. Also, a Living Trust can be especially useful for parents who want to provide fairly for children from previous marriages.
In some cases, small-business owners would benefit from a Living Trust. You may wish to transfer ownership of your businesses to your Living Trust. At death, your Living Trust can benefit your loved ones, while making sure that your businesses continue to grow in the hands of a qualified trustee who can keep your businesses going.
Setting Up Your Living Trust
You should only let a qualified and competent attorney help you set up a Living Trust. Be careful of people who will “sell” you a living trust. If you talk with a qualified and competent attorney now, you may save yourself and your loved ones trouble later.