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What Are Living Trusts?
Living trusts are legal documents created to manage assets and estates. An individual makes a living trust while he or she is still alive. Living trusts allow a trust creator to transfer assets, bypassing the complex and often expensive process known as probate. Probate involves all legal proceedings to prove a will in court so that the will gets accepted as a deceased individual's last testament. Instead, a living trust designates a trustee to legally hold the assets and property that moves into the trust.
Unlike a will, which takes effect after someone passes away, a living trust allows individuals to manage their assets and estate during their lifetime so that their assets can eventually benefit someone else. The legal document, or trust, designates a person known as the trustee to manage the assets included in the trust. As long as an item has value, you can place almost any item into a living trust. Common examples of objects put into living trusts include the following:
- Bank accounts
- Fine art
- Intellectual property
- Mining rights
- Real estate
- Savings accounts
How Do Living Trusts Work?
Living trusts follow a few main steps:
- The person creating a living trust, known as a grantor or settlor, transfers ownership of property or other assets to the trust itself. For example, you can place the trust's name on your property deed or vehicle title. The items in the trust together form the trust fund.
- The grantor then appoints a trustee. The trustee must manage the trust in the beneficiary's best interest. In turn, the grantor may name a trustee who is a relative or appoint a professional trustee. Professional trustees often come from financial institutions. Either way, the trustee must make sure to carry out the instructions of the trust. Here is an article about how to choose a trustee.
- When the grantor dies, the trust flow assets to the trust's beneficiaries must follow the grantor's wishes outlined in the trust agreement. Unlike a will, the living trust is already in effect when the grantor is alive. Additionally, the trust does not need to clear the courts when the grantor dies or becomes incapacitated to reach the intended beneficiaries.
A settlor can leave a full inheritance to heirs as the beneficiaries of a living trust. Grantors can also add specific conditions for beneficiaries to meet before they can obtain items in the inheritance. For example, a grantor might stipulate that a grandchild named as a beneficiary must complete a college degree before receiving a vehicle in the trust.
Types of Living Trusts
Two types of living trusts exist, revocable trusts and irrevocable trusts. Some grantors decide to start with a revocable trust, converting the trust to an irrevocable trust later when they are confident of their beneficiaries or rules of the trust. Additionally, once a grantor dies, a revocable trust converts automatically to an irrevocable trust since the only person who can change the trust is no longer alive.
A grantor can change or cancel a revocable trust at any time. A revocable trust, therefore, offers a flexible option. The settlor can alter or amend the trust rules, even changing beneficiaries or completely undoing the trust.
Revocable trusts are the most common types of living trusts. You might hear this type of trust referred to as a living revocable trust or a living trust.
A grantor can name himself or herself the trustee of a revocable trust to control the trust's assets. However, the trust assets remain part of the settlor's estate, potentially requiring the payment of estate taxes if the estate is worth more than the estate tax exemption at the time of the grantor's death.
An irrevocable trust is an active trust. No one can alter it. Even the grantor cannot change an irrevocable trust. To change this type of trust, a judge must decide if individuals can amend the trust.
An irrevocable trust reduces the taxable estate, but the grantor gives up certain control rights to enjoy this benefit. In effect, the trustee becomes the legal owner of the items in the trust. Additionally, once the grantor makes the trust agreement, individuals can't amend the trust's named beneficiaries.
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Advantages and Disadvantages of Living Trusts
Living trusts offer many benefits, but they have some drawbacks, as well.
Advantages of living trusts include the following:
- Saving time and money: Living trusts do not have to go through the probate process. The trustee can take care of the grantor's end-of-life affairs, such as funeral costs and distributing assets to the beneficiaries, without waiting for a probate judge's decision. This arrangement also cuts down on costs. Here is an article about the probate process.
- Offering protection if challenged: It is more difficult for potential challengers to challenge a living trust than a simple will. Someone would have to prove that the grantor became coerced into signing the living trust documents and forced to go through the trust funding process to challenge a living trust successfully.
- Offering more privacy protection: A will is a public document. Anyone can obtain a copy of a will from legal records after someone dies. However, a living trust is completely private. Unless the trustee shares the information, no one will know the living trust's details.
Disadvantages of living trusts include the following:
- Attorney fees: Living trusts require attorney support to set up. Likewise, if grantors want to change anything, they will need to work with an attorney.
- Possible inconveniences: Since a grantor sets up a living trust before death, he or she no longer owns the property contained in the trust. If grantors wish to sell something that the individual previously included in the trust, such as a car or house, they would first have to contact the trustee to take the item in question out of the trust.
- The necessity to retitle and re-deed: The grantor must re-deed or retitle property and other assets in the trust to name the trust fund as the owner. A living trust cannot work to its full potential unless the grantor goes through this process.
Here is an article about Probate Lawyers.
How Are Living Trusts Different From Wills?
A few key differences exist between living trusts and wills, including the following:
- Guardianship: Only a will can appoint a guardian for a child. A living trust cannot set up a guardianship.
- Probate process and costs: Although a living trust requires attorney fees to set up, it does not require probate costs. On the other hand, any property someone receives through a will is subject to probate.
- Status as a public document: A will is a public document that relatives can check at any time. A living trust protects the information within it.
- Time to set up: A living trust requires more paperwork and time to set up than a will requires.
Setting up a living trust requires you to make careful decisions and considerations. Work with an experienced lawyer who can help you make sure your wishes are transparent. In the end, you want to create a living trust that passes your assets to your beneficiaries in the way that you intend.
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