Living Trusts: What They Are and How They Work

A living trust can be a useful estate planning tool. Learn more here to see if you need one.
living-trust

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In estate planning, there are different types of trusts. Living trusts refer to trusts established during one’s lifetime, as opposed to testamentary trusts, which are created upon one’s death. Living trusts can be revocable or irrevocable, depending upon whether the trust can be modified or changed.

Generally, revocable living trusts or revocable trusts are commonly referred to as simply “living trusts.”

Here we discuss revocable living trusts, where the creator — or grantor — can change the trust as long as he or she is physically and mentally able.

What is a living trust?

A living trust is an estate planning tool that serves a variety of purposes. It can help you and your family prepare for an uncertain future. It can help your estate and your heirs avoid the hassle and costs of probate. And it can preserve your privacy.

As with all trusts, a living trust is a legal document by which the grantor retitles certain personal assets in the name of the trust (a separate legal entity) and authorizes a trustee to manage those assets as instructed and make decisions in the best interest of the grantor and any beneficiaries.

In a simple living trust, the grantor is often the trustee but also names a successor or co-trustee. The assets eventually will pass to the trust's beneficiaries.

A living trust differs from a will in several ways. For instance, living trusts can sidestep probate and keep your estate affairs away from prying eyes, but they cannot designate guardianship for minor children. This is why wills and living trusts are often used together as part of an estate plan.

Benefits and drawbacks of living trusts

As with any financial planning tool, there are benefits and drawbacks to weigh when it comes to living trusts and deciding if you need one:

Benefits

Drawbacks

  • Effective once signed and funded.

  • Protects in case of incapacity.

  • Avoids probate (saves on future probate costs).

  • Preserves privacy.

  • Less likely to be contested.

  • Generally, takes precedence over wills.

  • More complex and costly process to set up.

  • Cannot designate guardianship for minor children.

  • Does not provide tax benefits.

  • Does not protect against creditors.

How to set up a living trust

Although you can use online tools to DIY your estate planning needs, consulting with a seasoned estate attorney can be prudent when it comes to your living trust. An estate planning attorney can learn about your particular financial situation and estate planning goals, creating a customized plan just for you. A living trust requires more paperwork and can be more costly due to the attorney fees. However, since a living trust allows you to avoid probate, those future probate cost savings can help offset these legal fees.

Once your living trust is signed and effective, don't forget to fund it. Your living trust will be ineffective and the legal fees wasted if your assets are not retitled in the name of the trust. Oftentimes, your estate attorney can provide you with instructions on what types of assets to include and how to title them appropriately. Many times, your estate attorney will create what is called a "pour-over will" to ensure that all assets in your estate will transfer over to your living trust. This acts as a contingency plan in case assets are not titled properly.

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This article is meant to provide background information and should not be considered legal guidance.

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