What will happen to your assets when you pass on? Who will be the recipient(s) of your possessions? Are there any contingencies for the inheritance of your assets? Who will manage their distribution? All of these questions, and more, are answered in what is known as a living trust.
If you or a family member has considerable assets, it may be a good idea to create a living trust. Read on to learn all about living trusts, or use the links below to jump ahead to the section of your choice.
What is a living trust?
A living trust is a way to handle the management and distribution of your assets after you pass away. As with all trusts, a living trust is a separate legal entity that can be given ownership of your wealth, assets, and belongings. This may include physical things like real estate, bank accounts, savings accounts, vehicles, fine art, and jewelry. It also may include virtual “items” of value, such as intellectual property or mining rights. A living trust is aptly named, as it’s created while you are still alive. When you create a living trust, you (the grantor) assign a specific person to be the manager of your trust and everything within it. This person is known as a trustee. You also outline who you would like your various assets to go to once you pass on. These people are known as the beneficiaries of your trust.
Still wondering, “how does a living trust work?” Let’s look at an example, let’s say you own a fleet of luxury vehicles, which you would like to put in a living trust. Upon doing so, you (the grantor) transfers ownership of the fleet of luxury vehicles from yourself to the living trust. The fleet of luxury vehicles is now owned by or in the name of the trust. Along with transferring ownership, you’ve named your son as the trustee of your living trust. In your living trust, you’ve also outlined who will own each vehicle upon your passing, and whether there are any conditions that must be met before the ownership of the vehicle is transferred out of the trust’s possessions. For instance, each of your grandchildren will be the beneficiaries of one of your luxury vehicles, but only once they have graduated college. When you pass away, your son will manage the distribution of your luxury vehicles to each beneficiary, according to the terms specified in the living trust.
Advantages of a living trust
The primary purpose of a living trust is to avoid the probate process when the grantor passes on. The probate process is the process through which a court verifies the legality of the distributions of a person’s possessions once they pass on. In most cases, the probate process reviews a person’s will in order to confirm that the will is legal and that the estate may be distributed according to the will. In the case there is no will, the probate process is the process through which the court decides what to do with the person’s belongings. With small estates, probate can be fairly quick—perhaps a few weeks or months. For large estates, on the other hand, probate can take many years. Ultimately, the process length will vary depending on the estate. Additionally, probate offers the opportunity for anyone to present a claim to another person’s estate; this is important for those with complicated families or those with past troubles and unpaid bills. If the claim is valid, it must be investigated as a part of the probate process.
Items that are in a trust do not need to go through probate. As such, a living trust saves significant time in the distribution of a person’s estate once they pass on. Next, a living trust saves money; probate costs 5%-10% of the value of your assets. For large estates, this could mean a significant chunk of change. In some cases, a living trust reduces the amount of your taxable estate, as the assets in a living trust are no longer owned by you, but by the trust. Finally, a living trust offers much more protection from the challenge of claims to a person’s estate.
Disadvantages of a living trust
There are a few downsides to managing your assets via a living trust. For one, it creates an extra complication in managing your belongings while you are alive. In the creation of a living trust, you transfer the ownership of your assets to the trust, and the management of your assets to the trustee. That means that, if you wish to do anything with an asset that is in your trust, like selling one of your luxury vehicles, you will have to provide proof you are the trustee which requires having that documentation on top of your regular ID.
Speaking of transferring ownership of your assets, this must be documented on the deeds and titles of each asset. You’ll need to go through the process of re-deeding or re-titling all of your assets to reflect ownership by the trust. This is extraordinarily important to make sure you do. Just creating the trust is not the end. If you do not move any of your assets, re-title or rename, into the trust then the trust is pointless since it does not own any of the assets . Your estate planning attorney should help you and provide guidance on all the assets to re-title and re-name under the trust. Some attorneys will file deeds for their clients others will not so be sure to ask what you are responsible for.
Next, while living trusts can save you a considerable amount by avoiding probate down the line, they aren’t cheap to set up. A living trust is set up by an attorney, which can cost you a pretty penny. Any modifications down the line will need to go through an attorney, too.
Types of living trusts
Living trusts generally fall into two categories: revocable or irrevocable trusts. The main difference lies within the terms of the trust, and whether they can be changed at any time. Let’s take a deeper look at each type of living trust.
Revocable trust
According to fdic.gov, a revocable living trust is one in which the terms of the trust may be changed by the grantor at any time. A grantor can add or remove beneficiaries, change the trustee, modify the terms of the trust, or even cancel the trust altogether. A revocable trust does not reduce your taxable estate.
A revocable trust is a good way to eliminate the hassle of going through the trustee to manage the transfer of assets. Here’s how: you can set up a revocable living trust that establishes you, the grantor, as the trustee of the trust, too. That gives you much more oversight over the items in the trust. Once the time comes when you no longer feel capable of managing the trust, you can modify the trust to establish someone else as the trustee.
Irrevocable trust
An irrevocable trust is set in stone. It cannot be modified or cancelled once it is created. An irrevocable trust reduces the taxes of your estate, as the assets are transferred permanently out of your ownership as soon as the document is signed.
Special types of living trusts
There are a few types of living trusts designed for specific circumstances, such as:
- A special needs trust: This type of trust addresses issues that may be faced by beneficiaries who receive social security benefits, so as to not affect their eligibility for benefits or supplemental income.
- An irrevocable life insurance trust (ILIT) is created to own the grantor’s life insurance policy
Who should act as a trustee?
When it comes to selecting the trustee of your living trust, there are a few different things to consider. While a family member may feel like a simple choice, it can also be a volatile choice. Selecting one family member over another may cause animosity or a rift in your family. A family friend can also be a risky choice, as relationships have the potential to change over time. Many grantors that are worried about leaving their trust in the hands of someone they know opt for a professional trustee, instead, such as an attorney or a bank or private fiduciary. Here are some questions to guide your choice:
- Is this person trustworthy and responsible? Will they manage your finances well? Will they act on impulse with them, or do they make well thought out decisions?
- Is this person diplomatic, or do they act on favoritism or bias? Can I trust them to communicate effectively with the beneficiaries?
- Do I expect this person to outlive me? Do I expect them to be of sound mind upon my passing?
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