What is a living trust? Are living trust right for everyone? Let’s help you decide whether a living trust is something you should consider.
What is A Living Trust?
A living trust, revocable trust, or revocable living trust is a tool taking the form of a legal document that creates a living trust for identified assets.
In essence, it enforces your intentions after death, as if you were still alive.
In the document, you will be referred to as the grantor of the trust and the recipient is known as the successor trustee. This document doesn’t just protect the grantor, but also their family members who would otherwise undergo a lengthy, complex, and costly debate on the distribution of assets.
After a lifetime, you leave a treasure chest – one that you control the contents of, the distribution, and the trustee. This chest is your living trust.
Facts on the Trust
A living trust will protect your assets from the intervention of courts.
You skip the legal procedure that will expose your family matters to the public. In turn, you save on delays, lawyer fees, financial costs, and the whole hassle of a process.
Living trusts manage both assets and finances. Living trusts intervene to manage the grantor’s money as per their will. And, if the trust involves minor children, the trust is time-sensitive and can ensure inheritance is distributed in time.
Living trusts cannot entirely avoid taxes.
This document can protect the last will and testament, but it cannot protect you from taxes. While the grantor is still alive, property and other assets entail income tax. Upon death, the grantor’s estate incurs federal real estate tax and federal state death tax before the transfer.
Creating a living trust has three standard charges, so it cannot always save money
These are filing and court fees, executor’s commission, and lawyer fees. However, there are ways how to decrease the financial burden. A living trust can determine the executor which can be a family member who waives compensations, and the process is mostly consolidating paperwork that occasionally needs advice from a lawyer.
The Difference Between A Living Trust and A Will
There are four main ways that your last will and testament differ in benefits or costs to the grantor:
- Wills go through probate before the distribution of assets to beneficiaries. This process has its disadvantages, including the document being part of a public record.
- Both are considered legal documents of asset distribution, but a living trust needs more constant updating. Having to add every new property, naming the property to the trust, or having to transfer it to the trust may have personal costs.
- A will involves less money and complexity. It only requires a witness, not a notary public yet it will still apply upon the grantor’s death. A limitation of this legal document is its inapplicability if the grantor is incapacitated.
- A pour-over will counters the disadvantages of a living trust by avoiding the probate process for the assets unintentionally excluded in the trust upon death. The best way to benefit from this is to create both.
When Do You Need a Living Trust?
A living trust could be helpful for the following:
You have numerous valuable properties and assets to protect.
The benefits of the upfront capital can only be realized if undergoing the probate process will be complex, delayed, and expensive. Otherwise, the transfer of a small estate won’t be worth the costs of a living trust.
You want to secure your loved ones’ future.
There are multiple ways to ensure assets to beneficiaries, but the quickest method is through a trust. If you have a property to dedicate or money to be distributed, especially for minor children, a trust is for you.
Types of Living Trusts
There are four types of living trusts, two of which are more common: a revocable living trust and an irrevocable living trust. The last two are made for special conditions.
Revocable Living Trust
A revocable trust is the most common one as it provides the grantor autonomy over the fund.
As the owner, you can revoke or cancel this trust at any time or change the successor trustee, although it won’t be a quick process. A revocable trust allows you to use assets to the trust to your advantage. For example, you can mortgage or refinance, remove, or sell the trust’s assets. Upon the death of the grantor, the trust will operate as an irrevocable living trust where the trustee has to follow the declaration of trust.
Irrevocable Living Trust
The opposite of the revocable trust is the irrevocable trust where you cannot cancel or transfer ownership of the trust’s assets. If changes are to be made, it would require a legal document signed by the trustee and the other beneficiaries or a judge’s order.
An irrevocable trust will benefit you by removing assets from taxable estate thereby decreasing estate taxes. For example, if the value of your estate is over tax exemption, an irrevocable trust is preferable.
Special Needs Trust
This trust fund is dedicated to the financial needs of disabled loved ones. For example, a loved one with permanent or temporary special needs or who may someday have one. The requirements are set by state disability laws which require consulting a lawyer or an expert on the law to secure the benefits.
A charitable trust provides tax benefits to your beneficiaries if a trust helps a charity. There are requirements set by the IRS to ensure that the trust is created for public charity.
How a Living Trust Works
A living trust will contain the ownership rights of the trust’s assets. Upon the grantor’s death, the successor trustee oversees the distribution of the assets according to the terms of the living trust and pour-over will. Before death, the grantor is still the initial trustee, allowing them to control the property in the trust – each of which depends on the type of trust.
Assets in a Living Trust
Assets need to be assigned to a living trust for its ownership to be covered by the terms. The types of assets include the following examples:
- Real estate can be land, estate, or commercial property.
- Financial accounts can include stock and bond certificates, safe deposit boxes, mutual fund accounts, brokerage accounts, personal bank accounts, cash, money owed to the grantor, and insurance policies.
- Personal property includes jewelry, artwork, antiques, and other collections.
- Business interests on business-owned property and assets that the grantor may want to direct the use of even after death.
The successor trustee acts as the executor of a will. The trust is a legal document that the successor trustee follows when distributing property or assets. They also pay your debts, file tax returns, and use assets to pay your expenses on top of distributing assets.
Your successor trustee can be individuals such as adult children, relatives, trusted friends, or a corporate trustee.
A corporate trustee is a bank or trust company that acts as a trustee or co-trustee at present if the grantor is unable to dedicate time, ability, or desire to manage the fund. Corporate trustees have experience in investments and accounts management which make them objective and reliable trustee.
A living trust avoids court involvement, unlike a will. But, court proceedings can still apply in resolving disputes on the details of the declaration of trust. While a trust is not on public record, it can be if there is a legal challenge to the contents.
How Do You Create A Living Trust?
Funding A Living Trust
A living trust is only valid after two steps – the execution of necessary documents and transferring funds into the trust through assets. The process for this transfer depends on the type of property.
- Assigning Ownership Rights. If the grantor owns property without legal titles, assets of this kind can still be moved into the trust through the assignment of ownership rights from the grantor to the trustee. Examples of these properties include art, jewelry, promissory notes, intellectual property, and business interests.
- Changing Title. If the grantor holds a title to the assets such as in real estate, bank accounts, and investment certificates, the grantor can change the name of the owner from themselves to the beneficiaries.
The probate process is a legal procedure for estate distribution upon death. The court will process the inheritance to the proper heirs according to the law. A probate will authenticate your will, approve the executor, and will allow the executor to proceed according to the will. Absent a will, assets are distributed according to the law. You can skip this public, lengthy, and costly procedure with a living trust.
Estate Planning is the management and distribution of assets upon death or if the owner is incapacitated. Proper estate planning allows you to control assets effectively at minimal financial or personal costs. An estate planning attorney is most helpful to create a living trust so that the declaration of trust and pour-over will are clear, and to avoid probate.
Estate planning will include determining which assets to transfer into the trust fund, naming the successor trustee, whether a pour-over will is helpful, and naming the beneficiaries for each property.
Estate taxes are applied on the transfer of the estate of the person who dies if the value of the estate exceeds the exclusion limit set by law. But, only the amount that exceeds is subject to estate tax. Married couples who are transferring property between each other can avoid estate tax through a bypass trust, providing the spouse ownership of the property.
Advantages of A Living Trust
Living trusts create comfort and security that not only will assets be distributed according to the grantor’s will, but also hassle-free for their loved ones.
Legal challenges are also avoided as living trusts do not need to go through probate and a declaration of trust clarifies intention and instruction. If you value your privacy, avoiding court processes is an advantage as well.
A living trust is automatically activated when you die together with the immediate care of your affairs such as funeral costs and distribution of inheritance. Less time wasted in hearings, legal challenges, and waiting on transfers mean lower probate costs and more savings for your loved ones.
Disadvantages of A Living Trust
For the benefit of flexibility, you need to choose a revocable living trust among the other types of living trusts. And, to gain tax advantages, you need to choose an irrevocable trust or reduce the size of taxable estate.
While a living trust can decrease costs in the future or in certain conditions, there are standard charges such as filing fees for title transfers and changes as well as hiring an estate planning attorney. These charges are justifiable only when you have numerous and valuable assets to secure.
Admittedly, the functions of a living trust will benefit some situations and intentions more than others. However, there are multiple types and conditions that can tailor fit this estate planning tool for you and your family’s needs.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.