A living trust is one of the best ways to provide for your loved ones after you pass away. Living trusts can help make estate settlement easier for your beneficiaries, but like any legal tool, there are pros and cons to consider. Read on to learn more about living trusts and whether they are right for your needs.
What is a living trust?
A living trust is a legal tool you create during your lifetime to outline your final wishes regarding your estate. How they work is you (the grantor or trustor) designate someone to manage the trust (the trustee) for the benefit of your beneficiaries.
The trustee is responsible for getting your assets into the right hands and is held to a fiduciary standard, meaning they are legally obligated to manage the trust assets for the best interests of your beneficiaries.
If you die without an estate plan in place, state law controls who inherits what from your estate through a process called probate. Probate proceedings can cause stress for your heirs and strain relationships among family members.
Many people create living trusts to provide a framework for the distribution of their assets. A key feature of a living trust is that your assets pass directly to your heirs versus going through probate — which can take months and sometimes even years.
Irrevocable trust vs revocable trust
There are two main types of living trusts — irrevocable and revocable, with advantages and downsides to consider for each.
Characteristics of an irrevocable living trust
- No changes can be made to the trust without a court order unless the trustee and all beneficiaries agree
- Once you transfer assets into the trust, they are not included in your taxable estate, helping you minimize estate taxes
- You might be able to protect your assets from some creditors
Characteristics of a revocable living trust
- The grantor can revoke or change the trust at any point during their lifetime
- After your pass away, the trust becomes irrevocable (can’t be changed)
- Trust assets are considered part of your taxable estate, so there is no asset protection or beneficial tax treatment
What assets can you put into a trust?
Whether your trust is irrevocable or revocable, there are many types of assets you can transfer into your trust, such as:
- Real estate
- Bank accounts (checking, savings, CDs, etc.)
- Stocks and bonds
- Business interests
- Safe deposit boxes
- Non-retirement (brokerage) investment accounts
Don’t forget — once you create your trust, you must transfer each asset out of your name into the name of the trust. This process can be tedious and may require some back and forth with your financial institutions, but it’s necessary to experience the full benefits of your trust.
Living trust vs will
You can leave your estate to your heirs through a will (last will and testament) or a living trust. Both are vehicles that allow you to transfer assets to your loved ones, but how they are structured is different. For example, wills go into effect after you pass away, while trusts can be used during your lifetime and after you’re gone.
When you leave all of your assets to your heirs through your last will and testament, they are frozen upon your death, requiring your heirs to go through probate to have a judge order financial institutions and other third parties to transfer your assets to the heirs listed in your will.
To keep your survivors from having to go through the delay, expense, and hassle of probate, many people establish a revocable living trust and transfer their assets to the trust during their lifetime.
A living trust governs the distribution of assets when you pass away, essentially replacing your last will and testament. Assets in your trust do not have to go through the court system when you pass away.
With a living trust, you designate a successor trustee who, after you pass away, will be able to distribute trust assets directly to the beneficiaries you specify in the trust documents.
Living trusts and minor children
Living trusts are beneficial if you want to leave assets to minor children. When you leave money to individuals under 18, the court appoints someone to manage the assets for them, and it might not be someone you would have chosen yourself. The statutes governing asset distribution to minors can vary by state, so it’s important to read up on the laws in your area.
With a living trust, the trustee you name can manage the minor’s inheritance until they reach a certain age (which you can specify in the trust documents). Another benefit of a living trust over a will is if you become incapacitated, it can help you avoid a conservatorship because your trustee can manage things on your behalf.
Do I need a living trust?
A living trust offers benefits for many individuals and families. Here are some reasons to consider creating a living trust.
- You have assets in your name and want to simplify your estate settlement without the burden and expense of going through a court process
- You want to streamline the settlement of your estate and eliminate red tape
- You wish to designate someone as the successor trustee to handle assets in the event you become incapacitated or pass away
- You want your beneficiaries to have fast and easy access to your estate
- You want the inheritance of one or more of your heirs to continue to be managed in a trust for them even after you pass away
A living trust gives you the peace of mind that your loved ones will be taken care of after you’re gone. Living trusts help ensure a smooth estate settlement and give you the ability to specify who gets what. Your legacy is too important to leave up to anyone but you.