There are two basic ways to build ones estate planning foundation. One of these is a living trust. But what exactly is a living trust?
A living trust is a legal agreement that allows you, the grantor, to control how your assets are managed and distributed during your lifetime and after your death. This legal document includes a designated trustee, who is responsible for managing assets in the trust according to what’s best for its beneficiaries. Living trusts also provide specific directions for how assets should be distributed once the grantor dies.
Arguably one of the biggest appeals of a living trust is that, unlike a will, this legal agreement takes effect while the grantor is living, which can help prevent the trust from going through probate in order to distribute assets to the listed beneficiaries.
What assets can be assigned to a living trust?
To be covered by the terms of the agreement, assets must be assigned to the living trust. This officially retitles them as property of the trust. Real estate, financial accounts — including checking and savings accounts, money market accounts and CDs — jewelry, artwork and even business interests can be assigned to a living trust. However, note that retirement accounts, such as 401(k)s or IRAs, should not be assigned to a living trust. By doing that, you’re changing the ownership or structure of the retirement plan, which translates to an early retirement withdrawal in the eyes of the IRS.
The different types of living trusts
Living trusts can be structured in one of two ways: revocable or irrevocable.
A revocable trust allows the grantor to maintain control over the assets in the trust — designating themselves as the trustee. This gives them the power to change the trust’s terms, change beneficiaries, designate a new trustee, remove assets or terminate the agreement. This type of trust is especially useful if the grantor becomes unable to manage the assets. When this happens, the successor trustee will make decisions on behalf of the grantor. These trusts generally become irrevocable once the grantor dies.
An irrevocable trust is a legal agreement in which the trust becomes the legal owner of the assets. The key difference here is that the grantor cannot designate themselves as trustee, forfeiting certain rights of control over the trust. Once an irrevocable trust is created, the named beneficiaries are set and it can be very difficult to change. In fact, some changes may need to be approved in court.
Giving up control does come with some benefits, though. An irrevocable trust prevents its assets from being vulnerable to lawsuits and creditors. The grantor can also minimize their taxable estate because the assets legally belong to the trust.
Are living trusts worth it?
As with anything in life, there are pros and cons to establishing a living trust. With a living trust, assets can be transferred to beneficiaries smoothly, quickly and without interference from the court. As a grantor, you can also take comfort in knowing that under a revocable living trust, your assets must be protected by your successor trustee. Living trusts can also help reduce your taxable estate and protect you from litigation.
There are downsides to establishing a living trust. For example, with an irrevocable trust, the grantor gives up ownership and control over the assets assigned to it. For certain assets, such as real estate, to be transferred, the title change can be cumbersome and expensive. And unfortunately, unless all of the assets subject to probate are transferred to the living trust, probate cannot be avoided and all of the effort to avoid probate will have been for not.
While this information provides an overview of living trusts, a living trust is not a shoe that fts all feet and therefore it is best to consider the size of your estate and your estate planning objectives and only then, can we ensure that a living trust is the proper vehicle upon which to build your estate plan.