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What is a Living Trust and Why Might You Need One?

Living trust

Most people think of estate planning as a task you do in preparation for death, but have you considered what you might need while still living?

Usually you have goals such as passing assets cleanly to family members, providing for dependents, and minimizing any estate tax. Keep in mind that there’s no predicting the future – what happens if you become ill or incapacitated?

This is just one instance where a living trust can prove to be one of your most important estate planning tasks. Crucially, a living trust can come into play if you become incapacitated or ill, among other benefits.

Here’s what you need to know:

Free download: Steps to creating a living trust

Differences between a living trust and a will

Estate planning is a crucial exercise, especially if you’ve got assets to protect and family members to support. Unfortunately, there are still many people out there who mistakenly believe that a will is all the estate planning that they need.

The truth is there are major differences between a will and a living trust. A will is written up to go into effect after your death, however, a living trust takes effect during your lifetime. It can even help to protect your interests if you suffer incapacitation of any kind.

In its simplest form, a living trust is a legal entity where a person or corporation act as trustees to administer trust property according to the rules of the trust. The person who creates the trust is known as the “granter”, “settlor,” or “trustor.” Your may also name a successor trustee in the event that your trustee/s are unable to perform their duties. For example, spouses often act as a successor trustee for each other.

A living trust gives you greater control over what happens to your assets. For example, you can set up arrangements where trustees make regular payments to family members, rather than someone getting hold of a large sum all at once.

It can also help with matters such as operating your bank accounts if you are incapacitated. Millions of Americans are concerned with the idea of courts taking control of their assets before they die –  a living trust helps to avoid this situation.

A will may be a document to state how you wish your assets to be treated after your death, but it is still subject to probate court. On the other hand, a living trust helps you to avoid probate.

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Living trust

Why you want to avoid probate court

The probate process can be both lengthy and costly. This is the legal process whereby a probate court oversees that once you die, your debts are paid and your assets are distributed according to your will (or according to state law if you died intestate – without a will).

Because probate involves court proceedings, the entire process can take a long time – two years or longer in some cases. This also means that probate can be costly in terms of legal fees, executor fees and other costs. If you happen to own property in more than one state, your estate could go through multiple probates and deal with different state laws along the way. The whole situation can be messy for your loved ones.

Your family members will also find that, during the probate process, they have no privacy and no control over the process. Probate is a matter of public record, so anyone defined as an “interested party” can find out what you owned, anyone whom you owed and who will be getting what.

A living trust can involve creating a “pour-over-will” as part of your estate planning. This is a legal document that provides for the distribution of any assets acquired after the creation of your living trust or that were inadvertently missed when the trust was created. A pour-over-will is also subject to probate court.

Benefits of a living trust

Here are some of the core benefits to having a living trust:

Protect any minor children

A living trust can contain arrangements for minor children, should anything happen to you while they are still young. For example, it can lay out terms for how their inheritance is accessed and distributed.

The idea is that you preserve your assets for your loved ones and avoid any situations where they might be taken advantage of by unscrupulous family members or other parties. For example, the trust might state that money is held until the children are of an age where they should be responsible enough to manage it themselves.

Save money

Another of the benefits of a living trust is that putting one in place can save you money. A lot rides on your financial situation – at first glance, a living trust costs a lot more time and money to set up than a will, due to the complexity involved.

You need to have trust documents drawn up and spend time on paperwork that transfers assets such as bank accounts, stocks and bonds to the trust. You may also need to change your life insurance policy beneficiary to the trust. Your estate planning attorney and accountant will spend a lot of time on setup, which you will pay for.

However, money is saved overall after your death. Avoiding probate saves a lot more money than it costs to construct a living trust.

There is a common myth that a living trust will help you to save on estate tax, but the truth is it offers the same tax-saving strategies you could include in a will anyway. It isn’t an extra advantage estate tax-wise to have a living trust, although there may be some advantage to married couples in the form of joint living trusts.

Protect trust assets from other potential claimants

One of the benefits of a living trust that is important to many people is that it can help to protect your assets from those whom you don’t want making a claim. For example, sometimes people worry that in-laws might get half of their child’s inheritance in the event of a divorce, or that other family members or associates might lodge some kind of claim.

(Note: A living trust can still be contested in court, however, it will likely hold up better in court in the event that it is contested. One consideration is whether you need to set aside any money for court costs).

Your trust document will state exactly which family members or loved ones are intended as beneficiaries for your lifetime assets, as well as any life insurance policies. In the event that one spouse dies, then the remaining spouse gets a new partner, a living trust can also help to keep remaining assets out of the hands of a new partner and ensure they go where they were intended.

Protect yourself while you’re still living

Should you become incapacitated physically or mentally and unable to make decisions or take action with your assets yourself, a living trust can govern what will happen. This helps to protect you and ensure that your wishes for your assets are carried out.

Everything from how your bank accounts are to run to what to do with any real estate can be including in your trust documents. Importantly, this ensures that your assets aren’t depleted by anyone who might take advantage of your incapacitation.

Living trust

Living trust terms

Here are some key terms to understand in the lexicon of living trusts:

  • Inter-vivos trust – This is another term for a living trust. It is a latin term meaning “between the living” and refers to a transfer or gift made during one’s lifetime.
  • Revocable living trust – As it sounds, this means that provisions of the trust can be altered or cancelled at the will of the grantor.
  • Irrevocable trust – The terms of the trust cannot be altered or cancelled without permission from the grantor’s named beneficiaries.
  • Trust document – A trust document is an agreement that spells out the terms of the trust.
  • Trustee – The person or company who is responsible for managing the trust assets for the benefit of the beneficiary or beneficiaries.
Get our steps to creating a living trust here

Final thoughts

A living trust can be a key part of estate planning, especially if you have considerable assets or dependents to look after. Remember that estate planning is not about death, it’s about maintaining control over your assets, both while you are still living and after your death.

The best time to sort out your estate planning needs is now – while you are still healthy. This helps to give you the peace of mind that should the unexpected happen, you’ve already done what was needed to prepare.

An estate planning attorney along with an expert accountant can help you to define the terms of a living trust. This way you can ensure that your assets and your loved ones are looked after.

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