Living trusts (also known as “inter vivos trusts” and “revocable living trusts”) help to avoid the delays and high costs of probate, ensuring that your preferred heirs receive your assets, and managing the tax consequences of larger estates.
Living trusts are revocable, offering a great deal of estate planning flexibility. Living trusts can be amended, with assets added to and removed from the trust as appropriate. They can be changed as necessary and drafted to meet any person’s individual needs.
How a living trust may help you
There are several reasons why you could benefit from having a living trust:
♦ Avoiding probate: Assets titled in a living trust do not need to go through a formal probate court process in order to be transferred to beneficiaries.
♦ Distributing your assets to your preferred beneficiaries: Assets in a living trust must be legally distributed according to the wishes of the creator of the trust.
♦ Protection from creditors: Assets in the trust can be protected from the creditors of the estate’s beneficiaries.
♦ Managing the affairs of your children: A living trust can be used to appoint guardians for and manage the inheritance granted to people under age 18, thus avoiding guardianship probate proceedings. Trusts can manage the estates of young heirs well after their 18th birthdays, preventing young beneficiaries from abusing their inherited wealth.
♦ Managing your affairs if you become incapacitated: Assets in a living trust can be managed in the event of your incapacity by someone of your choosing, avoiding a formal court-ordered conservatorship.
♦ Tax savings for large estates: For very large estates, living trusts can reduce the burden of estate taxes.
♦ Flexibility with spouses: Trusts can be set up so that assets of a decedent can initially go to a surviving spouse, but then reassigned to different beneficiaries when the surviving spouse passes away. This is of particular importance when individuals have remarried and the deceased person has children from a prior relationship. The living trust allows the decedent to leave assets to his or her own children while still supporting the surviving spouse.
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Structure of a living trust
♦ A living trust is created by the owner of the property that is titled in the trust. The owner is call a settlor.
♦ The property in the trust is managed by a trustee, which is usually the owner of the property.
♦ The property in the trust is managed and distributed by the trustee for the benefit of a beneficiary. The initial beneficiary is almost always the owner of the property.
♦ When the settlor cannot act as a trustee due to incapacity or death, a successor trustee then manages the property either for the owner if the owner is alive but incapacitated, or for the owner’s beneficiaries.
Assets to transfer to a living trust
To obtain the benefits of having a living trust, it must be properly funded. Funding a living trust is the process of re-titling property in the trust.
Certain types of assets are almost always re-titled for a living trust, including:
- Real estate
- Asset accounts (e.g. bank accounts, stock accounts)
- Business interests (e.g. shares in a privately held company, LLC memberships)
- Intellectual property
Certain types of assets are typically not titled in the trust, but often name the trust as the pay-on-death beneficiary of the trust. These assets include life insurance and pay-on-death beneficiary accounts.
Retirement accounts are generally not re-titled in the name of a living trust, nor is a trust made the beneficiary of retirement accounts when the retirement account owner has beneficiaries who are capable adult children.
However, when minor children or children with maturity issues are involved, a retirement account can name the trust as the beneficiary so the retirement assets can be managed for the beneficiary.
Who needs a living trust
Any person with an estate larger than $150,000 could benefit from a living trust. The living trust allows the estate to avoid probate and provides for incapacity.
A living trust is a much more flexible and beneficial way of leaving assets than are joint accounts and pay-on-death beneficiaries. Although those devices will avoid probate, they do not help with incapacity nor do they usually provide the ability to add conditions to the estate such as age restrictions and contingent beneficiaries.
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