What is a Living Trust?
A Living Trust is a legal document that takes effect as soon as it's signed. This document designates a person (the "trustee") to manage certain assets on behalf of your eventual beneficiaries while you are still alive. You may choose to serve as the trustee during your lifetime. All assets placed in the trust immediately pass to the named beneficiaries after your death, and there are no associated probate costs.
Keep in mind that the assets placed in a Living Trust become the property of the trust, under the management of the trustee. Only the trustee has the authority to write checks and distribute property from the trust, which is why many people choose to serve as the trustees of their Living Trusts while they are still alive.
How does a Living Trust differ from a Will?
A Will (also called a Last Will and Testament) takes effect after your death. It's more limited in scope than a Living Trust but no less important. A Will allows you to designate an executor, direct how your property should be distributed, name a guardian for your dependents, and specify funeral arrangements. Like a trustee, a Will's executor makes sure your preferences and allocations are carried out as specified in the document.
Even if you establish a Living Trust, you'll still want to write a Will. One reason is that not all your assets can practically be transferred to a Living Trust, since you have to actively transfer them in writing. Also, some states do not permit a guardian for minor children to be named in a Living Trust. Furthermore, if you want to cancel any debts owed to you, you'll need to use a Will rather than a trust to do so.
Unlike trusts, Wills generally have to go through a probate court, which may assess fees based on the value of the assets. There may also be legal fees involved in settling an estate.
What are the advantages of a Living Trust?
One major benefit of a Living Trust is that it is not subject to probate, which can save your beneficiaries significant time and expense. Another advantage is that a Living Trust is a private document, whereas Wills are a matter of public record.
How can a Living Trust help with my finances while I'm alive?
Because the assets of a Living Trust are accessible during your lifetime, it can become a valuable part of your financial toolkit. For example, if you become seriously ill or injured and are unable to manage your finances, your appointed trustee can automatically take control of your affairs. This is especially important if you have dependents, own a business, actively manage one or more investments, or have other non-corporate fiduciary duties that would stagnate or suffer if you were incapacitated. If you haven't given someone the authority to handle your affairs if something happens to you, then a court may appoint someone to manage your affairs, and this appointee may be required to have each transaction approved by the court.
A Durable Power of Attorney provides a similar backup plan to that afforded by a Living Trust, since it names a trusted individual to act on your behalf. But there are some key differences. For example, the trustee of your Living Trust can only manage the assets that have been placed in the trust, whereas the agent named in your Durable Power of Attorney can have broader powers to handle a variety of financial activities on your behalf, as long as you allow for those powers in your Durable Power of Attorney document. You might consider having the same person serve as both a trustee for your Living Trust and as an agent in your Durable Power of Attorney. In that situation, the same person would have the ability to manage your financial affairs both within and outside of your trust if you become incapacitated.
Who you choose to handle your finances and the amount of responsibility you place on their shoulders should you, for whatever reason, become incapable of handling them yourself is a very personal decision. This is often a perfect time to ask a lawyer about your estate plan and the details of your specific situation.
What's the difference between a revocable Living Trust and an irrevocable trust?
Just as it sounds, you may change or revoke a revocable Living Trust at any time, whereas the terms of an irrevocable trust are fixed once it's signed. One advantage of an irrevocable trust is that the assets in the trust are usually not included in your estate for estate tax purposes. Also, any income generated from the assets in an irrevocable trust is generally not subject to capital gains tax.
Since federal estate taxes currently apply only to estates valued at more than $11.7 million and only 18 states have any estate or inheritance taxes at all, irrevocable trusts tend to be a tool for high-net-worth individuals.
Is a Living Trust right for me and my family?
You'll have to decide for yourself whether a Living Trust is the right choice, but it's best to consult with an estate planning attorney first. Some important considerations include:
- Your desire for privacy.
- The cost of probate court.
- Whether you have dependent children.
- Your net worth.
- Desire or need for financial stability should you become incapacitated.
- Ability to set up charitable trusts.
- Planning for adult children with special needs.
Make estate planning an integral part of your financial strategy
You may not want to think about your eventual demise, but it's guaranteed, and chances are at least some of your assets will outlive you. A sound financial strategy should include adequate estate planning. A Will is essential, but a Living Trust can provide financial security during your lifetime as well. Talk to an estate planning attorney to discuss your options today.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.