A common tool in estate planning is a living trust. Here is everything you need to know about how a living trust works and when it makes sense to add one to your estate plan.
What Is the Primary Purpose of a Living Trust?
A living trust is a legal document with specific instructions for what to do with specific assets after the grantor’s death. The grantor will distribute assets to the beneficiaries according to the grantor’s wishes.
This type of trust takes effect while the grantor is living. The primary purpose of this type of trust is to avoid probate. Assets in a trust are not subject to probate, and beneficiaries will receive them without the hassle and delay of the court system. Assets like cars or personal items that are included in your will but not in the trust will still be subject to the probate process.
Who Are the Key Players?
The people involved in a living trust have specific names for clarity. The following are the people who need to be identified in any trust, and what they are called:
- Grantor. This individual establishes the trust and decides asset distribution. The grantor retains full control of the assets and manages their investments. A grantor can act as a trustee.
- Trustee. The grantor chooses the trustee to manage the living trust. These individuals are responsible for distributing the assets to beneficiaries. The trust document outlines the terms of asset management.
- Beneficiary. These individuals or organizations will receive a distribution of assets from the trust. The trustee can distribute assets directly to the beneficiary, or the beneficiary can elect to receive income from trust assets.
- Attorney. You can hire an attorney to draft trust documents. An attorney can help draft living trust documents or advise on tax consequences.
What Assets Are in a Living Trust?
When assets are placed in a trust, they must be re-titled to reflect the name of the trust. Assets that can be placed in a trust include:
- Real estate. Includes commercial property, homes, and land.
- Personal property. Includes jewelry, artwork, and antiques.
- Financial accounts. Includes stock, bond certificates, mutual funds, brokerage, money market, CDs, checking and savings accounts, and cash.
- Insurance policies and annuities. Life insurance and non-qualified annuities are a part of a living trust.
Do You Still Need a Will If You Have Living Trust?
A living trust is a good estate planning tool, but in addition to a trust, you will need a will. A will addresses assets and interests not covered under the trust. Here are a few reasons to consider having a will alongside your trust:
- Guardianship provisions. If you have minor children, you can designate those individuals who will care for them in the event of your passing. A living trust typically doesn’t include a guardianship provision.
- Assets outside the trust. All assets cannot be transferred to a living trust. Retirement accounts and life insurance policies have designated beneficiaries. A will can list these accounts and policies and ensure the distributions are made to the beneficiaries.
- Personal property and sentimental belongings. A will can specify instructions on sentimental belongings and personal heirlooms.
Establishing a pour-over will is one possible way for a living trust and a trust to work together. A pour-over will contains a provision to “pour” over any unallocated assets in your living trust when you pass away. The pour-over will is designed to minimize the probate process and ensure all assets are distributed after your death as you wish.
What Are the Types of Living Trusts?
There are two types of primary living trusts:
- Revocable. This is the most common type of trust. Initially, the grantor is typically the trustee. The trustee can amend and change the trustee and beneficiaries, terminate the trust, and exclude assets. A revocable trust protects the grantor’s assets if they become ill or incapacitated. When the grantor cannot manage the trust, they appoint a successor trustee.
- Irrevocable. A grantor cannot be appointed as a trustee in an irrevocable trust. The grantor gives up certain rights and control over the assets. The trustee, in effect, is the legal owner. Once an irrevocable trust is established, there is very little a grantor can do to change beneficiaries or assets. The court, in certain cases, will have to approve the changes. An irrevocable trust is protected from creditors and lawsuits. The grantor may benefit from having fewer taxes since the assets are in the name of the trust.
Creating a Living Trust
An attorney usually handles the creation of a trust. Depending on the complexity of the estate, law firm, and region, costs could range from several hundred to thousands of dollars. While it’s possible to make a trust yourself with an online service, setting them up can be complex, and it’s usually best to enlist a professional to help you.
The process is as follows:
- Determine what type of trust you need —revocable or irrevocable.
- Decide which assets will be a part of the trust.
- Choose your beneficiaries.
- Designate the trustee – whether the grantor (you) or any successor trustees will manage the trust when you cannot do so.
- Complete the documentation and sign it in the presence of a notary public.
- Keep the trust document in a safe place (either a safe at home or in a safety deposit box), and make certain your trustee has a copy or has access to the document.
Advantages of a Living Trust
A living trust has several advantages that individuals may find helpful as a financial and retirement planning tool.
- Assets Fall Outside the Probate Process. With a living trust, the trustee transfers the assets through the trust administration process. Beneficiaries will likely receive assets quicker through the trust than through probate. Probate can sometimes take months or years to complete.
- Safeguards In Place in Case of Grantor’s Incapacity. A living trust allows a successor trustee to be appointed in case of a grantor’s incapacity. Having a living trust in place saves the family from petitioning the court for a conservator or guardian in case there is no power of attorney for financial transactions.
- Maintain Privacy. A living trust, unlike a will, asset transfer is private. This allows the grantor and those concerned a level of privacy that the probate process lacks.
- Protection Against Legal Challenges. Unlike a will, it isn’t easy to maintain challenges against trust. Even when challenges are posed to a living trust, these can be difficult to prove, especially if the trust has been established for many years.
- Tax Benefits. In an irrevocable trust, the trust owns the assets, and therefore, those assets could be shielded from tax liability. A financial planner or an attorney can let you know the specifics of the tax benefits.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
