Suppose you own something you want to give your loved ones when you die. You can ensure your family gets the item by putting it in a secure box. Then you ask someone to take care of the box. And when you die, they give its contents to your family. That’s how a living trust works. Except a living trust isn’t a physical box. It’s a legal agreement with instructions for taking care of the property you put in it.
This article explains living trusts. Trusts are subject to state laws. Since these laws vary, you should contact an estate planning attorney in your area. An experienced estate planning attorney who knows how to set up trusts will understand the specific laws in your state.
A living trust is also called an inter vivos trust. It’s an estate planning tool that replaces the will in your estate plan.
It’s called a living trust because it’s a legal document you create during your life. It serves two purposes. The first is to manage your assets while you’re alive. The second is to distribute your assets after you die.
A trust includes three parties. The person who creates the trust is the grantor. The grantor is also called a settlor or trust maker. The person who manages the trust assets is the trustee. The trustee manages the trust property for the benefit of the beneficiaries. The beneficiaries are the people who receive the property from the trust.
In a trust, you transfer ownership of your property to the trust. The trustee manages the trust assets according to the terms of the trust. The trustee is what’s called a fiduciary. A fiduciary must act in the best interests of the trust’s beneficiaries.
You can put many types of assets in a trust. The most common are the following:
- Real estate
- Life insurance policies
Living trusts may be either revocable or irrevocable. A revocable living trust is the most common type of living trust. You can change or revoke this type of trust after you create it. One benefit of the revocable living trust is that you can keep control of the trust’s assets by naming yourself as the trustee.
When you die, a successor trustee takes over to manage the trust. The successor trustee distributes the trust’s property to the beneficiaries.
Revocable living trusts are used in estate planning. They’re good tools for avoiding probate while ensuring privacy. Probate is the legal process of closing an estate. But it can be expensive and time-consuming. The probate process is also a public record. So, anyone can see the details of your estate, including who is inheriting money and how much.
Revocable living trusts don’t protect your assets against creditors or lawsuits. They also don’t give you any tax benefits.
An irrevocable living trust is a trust you can only change in limited circumstances. You also can’t take back any property you put into it. Unlike a revocable trust, you likely won’t be the trustee of your irrevocable trust. That means you lose control of your property. But this arrangement has its advantages. One is that the trust assets are protected from creditors and lawsuits. That makes these trusts popular for people in jobs vulnerable to lawsuits, like doctors.
Another benefit is that any property you put in the irrevocable trust is removed from your estate. Reducing your estate’s size will reduce your federal estate tax. Property in an irrevocable trust also isn’t considered when qualifying for Medicaid. That makes them suitable for special needs beneficiaries who are receiving government benefits.
Living trusts are complex legal documents. It’s a good idea to consult an estate planning attorney for help.
To create a living trust, you’ll first have to decide if you need a revocable or irrevocable trust. That will depend on the reasons for creating the trust. You’ll need to decide on who to make the trustee and who the beneficiaries are.
Next, you’ll need to draft the trust document. This document contains the trust’s terms. For example, how the trustee should distribute from the trust to your beneficiaries. It’s essential to ensure your trust conforms to your state’s laws. You may have to sign it before witnesses and a notary public for it to be valid.
After you have the trust document, you must move your property into the trust. This process is called funding the trust. You won’t get the benefits of the trust if you don’t fund it.
Living trusts are estate planning tools that can avoid probate and ensure privacy. But they are complex. The trust will only do what you expect if you create it properly. You also have to fund the trust after you make it. An experienced estate planning attorney can help. They can give you legal advice about your situation. They can also ensure your trust is correct and will achieve your goals.