Unfortunately, many individuals delay estate planning until it is too late. They might not understand it, they might not want to think about death, or they might assume it’s solely for the rich. But even the smallest of estates requires some forethought, and there are other reasons to do so besides death. Your wishes regarding your property, both during your lifetime and after your death, can be carried out with the help of a living trust.
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What is a Living Trust?
A living trust is a special kind of trust established during an individual’s (the trustor’s) lifetime that grants a third party (the trustee) the legal right to manage the trustor’s assets for the benefit of the trust’s beneficiary after the trustor’s death.
The term “inter-vivos trust” is sometimes used interchangeably with “living trust.”Because a living trust is created while the trustor is still alive, the trustor can use the trust to have access to the money, property, and investments that are designated in the trust. However, this is not the case with testamentary trusts and other varieties of trusts. A living trust can be made either revocable or irrevocable at the time of its creation. A trust that is created as “revocable” can be modified or revoked by the trustor at any time throughout the trustor’s lifetime. The trustor loses the ability to make changes to the trust after it has been established if the trust is created as irreversible.
How Living Trusts Work
The trustee of a living trust is an individual or organization with a legal obligation to act in the greatest interest of the trust’s beneficiary or beneficiaries as specified by the trust settlor. After the grantor passes away, the trust assets are distributed to the beneficiaries in accordance with the terms of the trust agreement.
Contrary to a will, a living trust continues to operate even after the settlor’s death or incapacity, and the trust’s assets can be distributed directly to the beneficiaries named in the trust without going through probate.
Types of Living Trusts
There are two types of living trusts: revocable and irrevocable. One of the advantages of a living revocable trust is that the trust settlor can act as the trustee and manage the trust’s assets. However, if the value of the trust’s assets exceeds the estate tax exemption at the time of death, the trust settlor may still be responsible for paying estate taxes on the excess.
The trust’s regulations can be altered at any moment by the trust’s settlor. As a result, the trust’s settlor has complete discretion over who benefits from the trust and whether or not to terminate it.
When creating an irrevocable living trust, the settlor gives up some control over the trust. Legal ownership passes to the trustee, but the individual’s taxable estate is decreased. The settlor of an irrevocable living trust has limited flexibility when it comes to changing the trust’s beneficiaries after the agreement has been created.
Advantages of a Living Trust
There are many reasons to establish a living trust, including tax minimization, asset protection, and inheritance strategy.
Some of the many reasons why you might want to create a living trust are listed below:
Support: Pay out benefits to those who have special needs or disabilities that prevent them from working and earning money on their own.
Capital Gains: Put an end to the trust’s current capital gains and give the beneficiaries all future capital gains.
Probate Avoidance: Lessening the financial burden and minimizing the delays that come with going through probate after somebody passes away.
Societal Well-Being: Giving to charity through a trust is a viable alternative. The trustor can benefit financially from their charitable contributions through these tax deductions.
Wealth Security: Give yourself a steady stream of income in the future while keeping your existing assets intact for your heirs.
Flexibility: When a trustor creates a living trust, the trust can be amended while the trustor is still alive.
Fee Reduction: Reduce or do away with executor compensation.
Privacy: Trust documents and asset distribution details are kept confidential after the trustor’s death. These records will remain private, unlike wills.
Creating a living trust is a great method to provide for your descendants financially while keeping your present income in your hands.
Disadvantages of a Living Trust
Though it’s natural to assume that a living trust will only bring about benefits, it’s important to be aware that there are a few drawbacks.
Planning Expenses: Due to legal requirements, developing a trust agreement might become an expensive choice. Costs associated with creating a living trust often run from $1,500 to $2,000.
Maintaining Trust Records: Once a trust has been established, it should be reviewed annually to account for any changes in the trustor’s financial or personal circumstances.
Re-titling Property: At the time a living trust is created, all of the trust’s assets must be re-titled into the name of the trust. There will be added time and legal costs for the procedure.
Nominal Asset Protection: If the trustor retains any ownership stake in the assets after establishing a revocable living trust, the trust offers little to no protection. In cases where the trustor also serves as trustee, this becomes clear.
Tax Consequences: A person will not get the same tax benefits if they form a revocable living trust. Both income and capital gains taxes, as well as creditors, will still apply to an asset even if it is frozen.
Administrative Costs: Other professional fees, such as investment advisory, are required after the initial costs of setting up a living trust.
It is generally agreed that a living trust is an excellent way to protect assets and guarantee financial stability in old age. Even yet, it is prudent to consider the trust’s potential drawbacks.
If you choose to use a living trust instead of a will, you’ll need to put in a little extra effort at the outset by transferring your assets into the trust and signing a Declaration of Trust. Additionally, you must keep adding to your trust by transferring assets there as you acquire them. Being the center of interest could last a long time if you’re still a young adult. If you don’t own much, you may not need a living trust, either. Having a will ensures a smooth, quick, and inexpensive probate process for a little estate.
Still, there are other scenarios in which a living trust could prove useful. You may choose to establish a living trust, for instance, if you are of retirement age, have a sizable estate, or have stopped purchasing new real estate. You can also use them to expedite the distribution of an inheritance to your loved ones.
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Read more: Retirement Planning
Source: CFI, Investopedia