When it comes to estate planning, more people are establishing a living trust in addition to creating their last will and testament. But what exactly is a living trust and what are the main benefits? The information below can help you better understand how a living trust works.
Living trust definition
A living trust is a legal document created by you (the grantor) while you are alive. It is generally used for the purpose of protecting your assets and ensuring they are managed and distributed according to your wishes.
What is the difference between a living trust and a will?
Just like a will, a living trust spells out your wishes regarding your assets, dependents and your heirs. The primary difference between a will and a living trust is that a will becomes effective only after you die and after it enters into probate.
In a last will and testament, you are specifying how you would like your assets to be handled after you die. In a living trust, assets are used to fund the trust while you are still alive. While both wills and living trusts are ways that you can provide for the distribution of your assets upon your death, they both work differently and offer their own benefits. The decision whether to create a will and/or a living trust depends on your individual circumstances. Before making any decisions, consult with a qualified estate planning attorney.
How does a living trust work?
A living trust is established and can remain under your control while you are still alive. Assets including real estate, stock portfolios and other assets of value that you specify can be placed in the trust.
A living trust can bypass the expensive and lengthy probate process, allowing your trustee or successor trustee to carry out your instructions as documented in your living trust at the time of your death. Moreover, if at any time you become incapacitated and are unable to manage your affairs, your successor trustee can step in and manage them on your behalf. When you pass away, the assets in the trust will be distributed to the beneficiaries you specify.
Types of living trusts
Now that we've discussed the difference between a living trust and a will, let's review the two types of trusts - revocable and irrevocable.
Revocable living trust
With a revocable living trust, you are typically named the trustee and retain full control over the assets in your trust. It's called revocable, because at any time you can change or revoke the trust. Your assets in the trust avoid probate by passing directly to your beneficiaries when you die.
Irrevocable living trust
An irrevocable living trust gives you the right to permanently and irrevocably assign your assets while you are living, relinquishing all control. Because you no longer own these assets, they are no longer considered part of your estate and generally won't be subject to estate taxes.
What are the reasons for setting up a living trust?
Some common reasons for setting up a living trust may include:
- Providing for minor children or family members who are inexperienced or unable to handle financial matters
- Providing for management of personal assets in the event you are unable to handle them on your own
- A way to avoid probate costs and delays, resulting in a more timely transfer of your assets to your beneficiaries
- A possible reduction in estate taxes
- You wish to keep the details about your estate private (unlike a will that is public)
What are the disadvantages of a living trust?
While there are many advantages to establishing a living trust, there are also a few disadvantages.
- The process of establishing a living trust can be a costly one, as documenting a living trust and the process of transferring assets into the trust is more complicated than drafting a last will and testament. According to ContractsCounsel, the process of creating a basic living trust can cost from $1,500 - $2,500.
- The process of thinking though and creating a living trust can be complex and time consuming. The process of transferring assets into the trust can be involved, requiring dedication of time and resources.
Things to keep in mind when writing a living trust
If you opt to create a living trust yourself instead of relying on an estate planning attorney to do so, there are several common missteps that you should make an effort to avoid.
- Don’t forget to include the names of the grantors, trustees and beneficiaries.
- Don’t forget to “fund” the trust. If the living trust is never funded, there are no actual assets to pass on to your beneficiaries.
- Don’t use “precatory” language that expresses wishes or desires, but does not create legal obligation. Legal documents require concise language and specific terms in order to fully enforce your final wishes
- Don’t neglect to hire a notary public. You may be able to skip on the expense of hiring an estate planning lawyer to help you draw up this document, but you shouldn’t opt out of hiring a notary public to notarize your document, even though it might not be required by your state.
- Don't forget to revisit your living trust every couple of years to make necessary adjustments, whether that's adding assets to the trust, updating beneficiaries or trustees.
It is possible to have both a living trust and a last will and estate. Remember, only the assets that fund the trust will be distributed through the living trust. You may have other assets that you wish pass on only after you pass away. Consult with a qualified estate planning attorney to determine whether a living trust and/or last will and testament might be right for you.