Contrary to popular belief, a living trust is not just for the wealthy. In fact, it can be an effective tool in estate planning for many different people – even those without a mansion, sailboat or a hefty bank account. Understanding what a living trust is and how it works can help you determine if it’s the right option for you.
Defining a Living Trust
A living trust is a legal agreement you, the trustor, create to basically store your assets until you pass away or become incapacitated (unable to make decisions for yourself). When that time comes, a trustee who you appoint will manage your assets or disperse them to your beneficiaries – the people you have chosen to receive them.
In simpler terms, a living trust allows you to appoint a person to manage and allocate your assets when you no longer can.
Unlike a testamentary trust, which is made after you pass away, a living trust is made when you’re alive. That way, you may be able to continue to use your property throughout the rest of your life.
Types of Living Trusts
There are two main types of living trusts you can have: revocable and irrevocable.
True to its name, a revocable trust allows you to revoke, change, or alter it while you are alive. Since it is not set in stone at the time of signing, a revocable trust is a flexible option that allows you to take on the role of trustee and beneficiary while you’re alive. That way, you can continue to use and manage your assets in the trust as long as you are able. You can change the roles at any time or name successors to take over when it is necessary.
In contrast, an irrevocable trust cannot be changed or altered by the trustor and cannot be revoked after their death. Once the trust is signed, it cannot be changed without the consent of the named beneficiaries. In an irrevocable trust, the trustor transfers their property to the trust, removing their legal rights of ownership. Giving up control of your assets may seem like a bad idea, but it actually has its benefits for all parties involved. Since the trustor no longer owns the assets in their trust, they can lower their estate taxes or avoid them completely. Assets in the trust are also protected from lawsuits, debt collections and divorce proceedings against the trustor. This is one of the main reasons people choose an irrevocable trust.
Specialized Living Trusts
There are also specialized trusts – revocable or irrevocable – for unique circumstances. For example, you can set up a charitable trust to send certain assets to a charity of your choice. Or, if you have a beneficiary with special needs, you can create a special needs trust that will keep them protected from losing other benefits. More on that later.
Living Trust vs. Will
When it comes to estate planning, wills are more common. Similar to a living trust, a will is a legal document that lays out how you want your assets allocated after your death. However, there are a few key differences between the two:
- Wills take effect when you pass away. Living trusts take effect as soon as they are signed.
- Wills require a probate process before distributing assets. Living trusts do not require probate.
- Wills typically cost less to prepare than living trusts, but they may rack up more costs for your beneficiaries due to probate.
- Wills are public record while living trusts are handled privately.
- Wills allow you to name guardians for underage children. Living trusts do not.
- Living trusts allow you to appoint a trustee to manage your assets if you become incapacitated. Wills do not.
- Living trusts are typically much more difficult to contest than a will.
Advantages of a Living Trust
The differences listed above make the living trust a beneficial part of an estate plan for many. Here’s a deeper look into some of its main advantages.
They Do Not Need to Go Through Probate
What is probate? It is the process by which a court validates your will, settles your estate, distributes your assets as directed and pays any estate taxes owed.
Unlike a will, living trusts do not need to go through probate since the titles have already been transferred to the trust. Why is it beneficial to avoid probate? Because the process can cause your final wishes to get tied up in court dates and legal fees, causing a headache for your beneficiaries and postponing the distribution of your assets, especially if there are complications.
Keep Your Personal and Financial Matters Private
Because probate is a state legal process, as soon as your will goes to the court it becomes public record. That means anyone can have access to your personal and financial information, which may include an inventory of your estate, copies of your will and other legal documents, and the names of your beneficiaries. Since living trusts do not go through probate, your information is kept private.
Protect Your Beneficiaries
Along with protecting privacy, living trusts can add other layers of protection that bring you peace of mind knowing your assets will be handled properly when the time comes.
By assigning a trustor to manage the distribution of your assets, you can protect beneficiaries from themselves. For example, you may have a beneficiary who is in a bad marriage, suffers from addiction, is bad at managing their money, or is just too young to understand how to use an inheritance wisely. In these cases, you can add specific directions or stipulations to their inheritance or use a specialized trust. For example, you can disburse the money in monthly payments instead of one lump sum, make the assets only accessible after an 18th birthday, or leave assets only to those in your direct bloodline, which would exclude spouses.
If you have beneficiaries with special needs, having someone manage their assets through a special needs trust could protect them from losing important assistance. If they inherit anything through a will, they could lose such government benefits as Supplemental Security Income or Medicaid. This isn’t so with a living trust. Because the trustee, not the beneficiary, has control over the assets, government programs do not consider them as income when determining eligibility.
When setting up a trust with specific directions and stipulations, it is best to consult a legal professional to make sure the trust is written correctly to best meet your wishes.
Do You Need a Will if You Have a Living Trust?
Even if you have a living trust, you should also create what’s called a “pour-over will,” which works in conjunction with your trust. The pour-over will acts as a safety net by covering any assets that are not in your trust, whether forgotten, omitted intentionally, or acquired after the trust was created. You’ll also need a pour-over will if you wish to name a guardian for your underage children or want to provide final wishes for your funeral and burial. These are important issues that a living trust does not cover, so it is advised to create a will, as well.
While most people should have a will, not everyone needs a living trust. Whether you need one depends on a number of different factors.
Should You Get a Living Trust?
You don’t have to be a millionaire to have a trust. In fact, if you fall into the following categories it may be a good idea to look into getting one:
- You have children.
- You’ve had multiple marriages.
- You have a financial interest in a business or company.
- A family member is disabled or mentally/physically ill.
- You are on bad terms with one or more of your family members.
- You deem family members irresponsible with managing financial affairs.
Since these aren’t the only circumstances, a professional should help you decide whether a will or trust is best for you. If a living trust is the right option, here’s what you need to know about getting one.
How to Get a Living Trust
Before jumping into the actual drafting of the living trust, there are few initial steps you should take to help the process move quickly and smoothly.
- Take inventory of your assets and determine which ones you want to include in your trust.
- Compile all the legal documents that go with each asset, including titles and deeds.
- Make a list of people you’d like to add as beneficiaries and those you want to exclude from your trust.
- Choose the assets you want to leave each person, how you want those assets distributed, and when.
- Decide on the type of living trust you want. Remember, a revocable living trust can be changed; an irrevocable trust cannot.
- Choose a trustee. If you decide to get a revocable trust, you can name yourself as the trustee. However, you still need to choose a successor trustee to take over at the time of your death or if you become incapacitated.
- Decide how you want to draft the trust. Will you draft it yourself or use a lawyer? Depending on what you choose, there will be some costs associated with the process.
How Much Does It Cost to Prepare a Living Trust?
According to LegalZoom.com, a website that helps people create legal documents without the counsel of lawyers, “the average cost for an attorney to draft a living trust can range from $1,000 to $1,500 for individuals and $1,200 to $2,500 for married couples.” Of course these are only estimates, as fees vary from state-to-state, the lawyer you choose and the complexity of the trust.
Another option is to draft your own living trust, which may cost you around $100 for how-to books and software that helps you create it.
Do You Need a Lawyer to Set Up a Living Trust?
While there are helpful resources for a DIY living trust, working with a lawyer is recommended. Trusts are legal documents and can be complicated to draft. Therefore, you are taking a risk drafting one yourself. A single error could completely invalidate the trust. Lawyers who work on living trusts have the education and experience needed to draft a document that will be the most beneficial to you and your final wishes. They’ll know the right questions to ask and the nuanced laws that are specific to your state.
In addition, they add a human touch to the process that DIY software and books cannot. They can provide advice and guidance, answer your questions in person and better customize the trust to your unique needs.
How Long Does It Take to Create a Living Trust?
Whether you choose to draft the trust on your own or hire a lawyer to do it for you, the time it takes to create it depends on the complexity of the trust, how motivated the person drafting it is, and if there is an emergency that requires an expedited process.
Creating a living trust can take as little as a few days or as long as a few weeks, on average. Once you sign the trust (in the presence of a notary), it is effective immediately. However, you’ll need to fund it, which typically takes a few months to complete.
Funding a Living Trust
Funding a living trust is the act of transferring your assets into the trust. While it is ultimately up to you on what you wish to put into the trust, your assets may include real estate, bank accounts, investment accounts, stocks, bonds, partnership interests, and such personal property as cars, boats, jewelry, and clothing. Be sure to get advice from an attorney and financial planner to ensure that the assets you are transferring make the most sense for you.
Depending on what assets you include, funding the living trust may require you to transfer titles, obtain a new deed, and assign new ownership. While it seems like a heavy lift, without funding, a living trust is just a legal document with no purpose.
How Does a Living Trust Affect Property Titles?
If you want to transfer real estate property (a home, for example) to your trust, you will need to prepare and assign a new deed, transferring ownership to the trust. Personal property with a title (a car or boat, for example) will require a new title in the trust’s name as well.
When you transfer your property to the trust, the name on the title or deed will change to “[Trustee Name], trustee for [Your Name] Living Trust.” You should apply the same naming convention to your other assets, including bank accounts, stocks and mutual funds, as well.
It is important to note that once you transfer ownership to the trust, you will no longer be the legal owner of that property. That means you cannot manage, use, or sell it unless you have a revocable trust and have named yourself as the trustee and beneficiary. If you name yourself the trustee, you can still use and manage your property as long as you are able.
This is just the tip of the iceberg when it comes to the ins and outs of a trust. Since everyone’s lifestyle is different, it’s important to consult an attorney and financial planner to determine the best course of action for you.
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