What Is a Living Trust and Why Should You Have One?

A living trust is an effective way to handle one's estate, especially in providing clear direction on how one's assets should be disbursed (and to whom) after death.

A living trust primarily helps individuals maintain greater control over their assets and have their wishes carried after they die. A living trust can help save the expense and delay of probate, which can last as long as three years and take up to 10-to-15% of an individual's estate's value. As you don't have to register a trust with the courts, setting one up can also provide you with more privacy than a will.

After all, estate planning isn't about dying. It's about your control over your assets - control while you are living, and control after your death. One of the most basic ways to gain control is through a living trust. A trust provides flexibility - and creativity - with the level of control over funds passed to heirs that a will alone might not.

The power of a trust is in the control. For example, a parent leaving money to a child could leave that money with a third party, such as a financial institution, to be given to the child at whatever age the parent decides - or even in annual increments. Other examples include setting up trusts to keep the assets away from the "in-laws" and other creditors like bankruptcies and lawsuits, etc.

The best time to plan for your estate is while you're healthy and able to make sound financial decisions. It's these decisions that will:

  • Ensure your estate/asset directions are carried out when you're gone.
  • Act as guideposts for providing for your dependents and efficiently distributing your assets.
  • Resolve any conflicts that might arise over the distribution of your assets after you're gone.

Different Types of Living Trusts

There are myriad forms of living trusts, all of which can be set up easily with the help of a good estate-planning attorney. These types of trusts are worth considering:

  • Revocable trust. A revocable trust enables an individual to keep control of assets while he or she is still alive. With a revocable trust, the trust assets can be shifted around, and the trust is fairly flexible in its structure. It can be amended at any time and it can be revoked at any time. If you're looking for an estate planning vehicle that offers privacy advantages and control over assets, a revocable trust is a good place to start.
  • Irrevocable trust. An irrevocable trust is different than revocable trusts, in that they cannot be changed and cannot be revoked. Any assets included in an irrevocable trust can't be accessed by creditors. A good candidate for an irrevocable trust is a doctor or surgeon who is at risk of malpractice and could be sued in a court of law. In that scenario, an irrevocable trust provides a shelter against such lawsuits, and provides ideal asset protection.
  • Asset protection trust. This type of trust helps protects the trust holder's assets from any future attempt by creditors to claim an individual's assets. Asset protection trusts can be established for a specific amount of time, and all assets in the trust that go undistributed are returned to the trust holder once the trust expires.
  • Charitable trust. Charitable trusts are just what they sound like - trusts that are established to benefit a particular charity or favorite cause. Such trusts not only provide an outlet for an individual's favorite charities and causes, they also provide significant tax benefits for the trust holder, as they aid in lowering or bypassing estate and gift taxes.

Benefits of a Living Trust

Properly drafting and transferring your assets to a revocable living trust, allows you to keep control over your assets, avoid the court probate process and better deal with multiple other issues such as bizarre sequences of death, certain incapacity issues that cannot be dealt with using a simple bank or investment account.

Those aren't the only advantages of a living trust. These benefits are worth considering, as well.

  • You'll bypass probate. You don't want a judge deciding who gets your assets when you're gone. A living trust gives you the right to distribute your assets, as you see fit.
  • You'll save cash. Probate costs can be significant, so by avoiding the courts, you'll save money, too.
  • You'll have peace of mind. A living trust takes away any angst over how your estate will be handled after you're gone. In black and white, a living trust provides clear direction on how your assets will be distributed.

How to Set Up a Living Trust

Setting up a living trust is a fairly straightforward task, but it's advisable to bring aboard an experienced estate planning attorney to help establish your trust. In doing so, follow these guidelines:

Step 1: Choose What Type of Trust Works Best for You

Selecting a living trust depends on several factors. Are you married or single? Do you have children? Do you own a business? What is the size of your estate? Again, consult an estate planning attorney or financial adviser to choose the trust you need.

Step 2: Decide What Will Go Into Your Trust

Your next move is to choose what assets will go into your trust. By and large, living trusts are meant to house large assets, like an investment portfolio, any business you own or your home.

Step 3: Pick Who Will Receive Assets From Your Trust

Usually, a trust will benefit a spouse, family member, friend, business partner, or a charity - but it doesn't have to. Think carefully who matters to you, and who will inherit your trust's assets.

Step 4: Name a Trustee

You'll want a trusted partner to administer your living trust after you die. It could be a spouse, son, daughter, attorney or anyone you choose. Make sure you discuss the trust with any potential trustee beforehand, as administering a trust is a big responsibility.

Step 5: Complete Your Trust Document

Filling out living trust form is fairly basic. You'll answer queries about your background and your financial assets and then, once completed, you'll sign your trust (your spouse will need to sign, too, if the trust is shared.) In most cases, you'll need to sign your living trust in the presence of a notary public. Have your estate planning professional review your trust before signing off on it.

You'll want to store your trust in a safe spot, like a home safe or a bank deposit box, for easy access. Let your trustee know where your trust document is stored and provide directions in accessing the document.

Living Trust vs. Will

Creating a legal document that dictates who will receive your assets when you're gone is a great idea, but there are different ways to go about it. In that sense, knowing what a living trust brings to the table versus a traditional will can help you make the best choice.

Here's how the two stack up:

  • Timing. The biggest difference between a living will and a trust is timing. With a will, the instructions go into effect when you die. With a living trust, instructions go into effect right after you sign and notarize the document.
  • Probate. In general, a traditional will still has to go through probate before assets can be distributed. A living trust, on the other hand, avoids probate, unless creditors become an issue.
  • Public versus private. With a will, the document details are public once the document is presented to the probate court. With a living trust, only the document's beneficiaries can see what's in the trust - otherwise, a living trust is kept hidden from prying eyes.
  • Costs. Since wills go through probate, costs associated with going through court can add up. By avoiding probate, a living trust avoids those costs and fees.

A living trust can be an extremely helpful document in distributing estate assets. Just know that going into the process, the experience can be maximized by consulting with a solid estate planning attorney or financial adviser.

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