You may have a Will to declare how you want your assets distributed after your death. But a living trust can achieve the same objectives with more individualized control, while saving your loved ones the time and money that probate requires. A living trust is also a great tool to plan for potential incapacity.
What is a Living Trust?
A living trust is a written agreement that is created while you are alive and can be modified as long as you are alive and competent. In most cases, you will be the trustee and the beneficiary of your living trust while you are alive. If you are married, you can create a joint living trust with your spouse. Both of you can be co-trustees and beneficiaries until one of you passes away, at which point the surviving spouse then becomes the sole trustee and sole beneficiary.
To finalize the creation of your trust, you must transfer the property you own into the trust. But, even though you are transferring your assets to the trust, you remain in total control, with the ability to withdraw or add property to the trust during your life. The more property you transfer into the trust while you are alive, the easier and less costly it will be for your beneficiaries.
Purpose & Advantages of a Living Trust
With a Will, your beneficiaries will need to re-title all of the assets that were in your name at the time of your death into their own names. This court-supervised process is referred to as probate and can take months or even years to complete. By contrast, with a trust a successor trustee can quickly transfer the trust property to your beneficiaries according to the terms of your trust agreement without the need for probate or approval from any court.
Another benefit of a revocable living trust is the control you enjoy over how your assets are distributed. If you don't want a beneficiary to receive an inheritance immediately, you can set up restrictions on how and when an inheritance will be distributed.
Another common reason to set up a living trust is when the trust beneficiary is a minor or individual with special needs. Having certain provisions in your trust can avoid the need for the court to appoint a guardian to care for these individuals after you pass away.
Furthermore, provisions in your living trust can also prevent the release of assets to a minor or until a person reaches an at which you think they can handle toe responsibility of an inheritance. For special needs individuals, leaving your assets in a trust can allow them to increase their quality of life, without jeopardizing their access to public benefits.
In addition to giving you greater control and flexibility, a living trust also helps protect you in the event of incapacity, and with longer life expectancies, the risk of incapacity is increasing. It is not pleasant to think about, but who will manage your financial affairs if you were unable to? If you have a living trust, you will clearly identify who will manage your assets if you are incapacitated.
Living Trust vs. A Will
A Will is a simple and short document that states to whom your assets will go in the event of your death and whom you want to carry out your wishes (the executor of your estate). A Will is attractive to some because it can be quite simple and works well to manage the distribution of small estates. However, it won’t avoid probate and will have difficulty addressing complex methods of distribution, like holding assets until an heir reaches a certain age.
Like a Will, a revocable living trust states to whom your assets should go in the event of your death and who you trust the handle that distribution (the trustee of your trust). However, a trust is usually a longer, more complex document that provides the following benefits:
- Probate avoidance
- Better lifetime management of assets for minors and special needs individuals
- Asset protection for your beneficiaries
- Privacy because there is no court filing or public reporting required
- Ability to hold assets until a beneficiary can responsibly manage the assets
- The ability to plan for your incapacity
Keep in mind, however, the main disadvantage of all trusts are that they are useless unless they are properly funded with assets either prior to your death or incapacity, or upon your death with a pour-over will. Another disadvantage is that they are more costly to draft than a simple Will. However, in the long run a trust will typically be less expensive than a will because it will avoid the cost of probate.
Living Trust vs. Irrevocable Trust
Essentially, all trusts can be classified as either:
- Revocable; or
A revocable trust, the most common type of trust, permits the grantor (the person who created the trust) to amend the trust or to revoke it completely, as long as he or she is alive and competent. After the grantor passes away, the revocable trust typically becomes an irrevocable trust. Revocable trusts are very flexible and can be amended as your estate planning needs and goals change.
Irrevocable trusts differ from revocable trusts in that they cannot be amended, changed, or revoked by the grantor after they have been executed. They may, if drafted properly, be amended or changed by the trustee to a limited extent. The main benefit provided by an irrevocable trust is that once it has been executed, assets that have been transferred into the trust are effectively out of the reach of your creditors, the IRS, and probate courts.
So, although you relinquish control over your assets with an irrevocable trust, you gain highly sought-after tax savings and asset protection. Thus, an irrevocable trust is most often preferred when the primary objective is asset protection and to limit tax liability.
For more information regarding estate planning with a living trust, and to find out if a living trust is right for your family's estate planning needs, contact our experienced and knowledgeable trust and estate planning attorneys through the contact link on our website.