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What is a Living Trust and Why Is It Important to Have One?
A living trust is a legal document that allows you to control what happens to your property after you die. It also allows you to avoid the cost and hassle of probate. In this blog post, we will discuss what a living trust is and why it is important to have one.
Think about how many people in their 20s buy something expensive, like a car, on credit without understanding how debt works. Imagine how much worse this could get with a large sum of money. The same principle applies to a person’s estate but becomes exponentially more complicated.
Having a living trust will be less time consuming for your family and beneficiaries, less stressful, and save them money while they go through the process of grieving your death, distributing your assets, and honoring your beneficiary designations.
A living trust also avoids probate, which might be necessary if a person dies without any other legal documents or legal forms outlining their wishes for what happens to their property and assets after death.
What is a living trust?
A living trust is a legal document that allows you to control how your estate and assets are distributed after you die. This is an arrangement in which you can choose to transfer the ownership of your assets to another person during your lifetime or after your death.
It involves three parties: the person creating the trust, known as the grantor, one or more people who will be in charge of carrying out the instructions contained in the trust, called the trustee, and beneficiaries of the trust, those who receive its benefits.
The trust’s purpose is to avoid the probate process at death and assure privacy for personal matters. The trustee may distribute assets as they see fit according to instructions set forth by the grantor while they were alive. As long as these instructions conform with state law and the legal process, there should not be any issues related to distributing an estate this way.
When do you need one?
A living trust is an important estate planning tool that can help you manage your assets during your lifetime and distribute them according to your wishes after your death. You may need a living trust if you have a large estate, especially if you want to avoid probate, or if you want to manage all your assets in the event of incapacity. The more complicated your situation is, the more likely it will be helpful for you to create a living trust.
However, due to its importance, living trusts have become even more common with small-estate owners than they were before. If you don’t want to leave anything up to chance, consider speaking with an attorney about setting up a living trust as part of your estate planning needs.
Here are the steps you should consider:
Types of Trusts
1) Revocable Living Trust
A revocable trust, also known as a grantor trust, is the most common type of living trust. It allows you to change the terms of the trust or even revoke it entirely if your circumstances change. Revocable trusts give you the most control over your assets during your lifetime.
2) Irrevocable Living Trust
An irrevocable trust is one that cannot be changed or revoked after it has been created. This type of trust might be right for you if you want to make sure your assets are distributed according to your wishes and you don’t want anyone, like your trustee, to be able to change the terms of the trust. Irrevocable trusts are also often used for asset protection or to minimize estate taxes. Once you create an irrevocable trust, you will no longer have control over the contributed assets that are placed into it.
3) Charitable Remainder Trust
A charitable remainder trust is an irrevocable trust that allows you to make a gift to charity while also providing income for yourself or your beneficiaries. The assets in the charitable trust are sold and the proceeds are reinvested. The grantor or beneficiary receives periodic payments from the trust, which can be for a set period of time or for life. At the end of the trust term, the remaining assets pour over and are distributed to the chosen charity.
4) Testamentary Trust
A testamentary trust is created through a will and only goes into effect after the death of the grantor. This type of trust is often used to provide for minors or disabled beneficiaries who are not able to manage their own affairs. The trustee manages the assets in the trust according to the instructions outlined in the will.
5) Special Needs Trusts
A special needs trust is a type of irrevocable trust that’s used to provide for the care of a beneficiary with special needs. This type of trust can be used to supplement government benefits like Medicaid and Social Security. The trustee manages the assets in the trust according to the instructions set forth by the grantor.
Top reasons you need a living trust
Living trusts are designed to help in various situations, including when you become incapacitated. You may not be able to care for your assets if you become incapacitated, but with a living trust, they will be cared for by someone else, typically your trustee.
1) A living trust helps you avoid probate.
Of the most vital reasons you may find it necessary to have a living trust, avoiding probate would probably rank at the top. The probate process refers to court proceedings that can delay how quickly an individual’s estate can be settled and distributed. This will require you to spend more money on a law firm and an estate planning attorney.
If there is no clear executor, trustee, or beneficiaries designated for one’s estate, it could take months or even years before a case reaches completion through probate court. In some instances, cases can even drag on indefinitely.
In this situation, having a living trust gives beneficiaries a sense of security, and helps protect assets, knowing that their inheritances won’t be delayed longer than necessary. Furthermore, because the property in question is already owned outright, there isn’t any concern about creditors coming out of nowhere and filing claims against these properties.
2) A living trust allows you to decide who inherits your property.
Some people might think everyone automatically inherits property from their parents upon death. However, this isn’t always true.
When creating a living trust during estate planning, individuals can specify who should receive what pieces of property upon death; even if they don’t include a surviving spouse or minor children. The decisions of the estate plan, like who will be beneficiaries, the trustee, and who will receive the benefits of the living trust, are ultimately up to the individual that’s creating their trust.
The only time minor children automatically inherit property is when they’re included as equal beneficiaries in the trust document. Otherwise, all decisions rest solely with the person drafting the document during the estate plan.
With this being said, adults may want to consider providing benefits for children who aren’t included as equal beneficiaries in the trust document. This way, those who were left out still get something. This point addresses the idea that while anyone can inherit property under a living trust, an individual has control over who gets what. To keep family drama low, each person in the family should ideally be included equally.
3) A living trust reduces taxes on inherited assets for estate tax purposes.
When an individual passes away, their estate is subjected to estate taxes as stated by federal and state tax laws. Unfortunately, the taxable estate can eat up a large portion of the assets that would have otherwise been inherited.
However, if you own property in your living trust or pass along other assets via living trust provisions and transfer ownership, they’re exempt from inheritance taxes. Therefore, a living trust will allow heirs to enjoy more inheritance with the added benefits of not worrying about a costly estate tax.
Mind you, these tax exemptions only apply to assets transferred into the living trust. Any assets that are passed down outside of a living trust will be subject to taxation like usual.
If, for instance, you sell your house to a relative and they then sell it back to you within two years, the government considers that home sale a gift and assesses taxes accordingly. However, suppose the same transaction occurs between two parties who both have living trusts set up (i.e., buyer and seller). In that case, there’s no fear of paying unnecessary taxes since the asset was never technically sold in the first place, it merely changed hands.
4) A living trust protects your loved ones from financial ruin and stress over bank accounts after you die.
If your family, or trustee, doesn’t have access to all of your assets during your time of dying, they may need to resort to credit cards or loans to pay for medical expenses.
For instance, let’s say an elderly person doesn’t have much money saved up because he or she likes spending it on various luxuries. After passing away there may not be anyone around who’s willing or financially able to help pay their bills. This is a common and unfortunate scenario that a living trust can prevent. A living trust ensures that your loved ones are taken care of in the event of your death, whether from an illness or old age.
5) A living trust can help you keep your affairs private and confidential.
When an individual dies, especially if he or she has been in the public eye, it’s not uncommon for numerous journalists, photographers, and other media personnel to flock around his or her estate. Unfortunately, having cameras all around can cause unnecessary stress on loved ones, especially if those who are grieving are already dealing with more than enough pain.
With a living trust set up in advance, you can dictate what kind of information becomes public record after your death. That way, you can maintain some privacy and dignity in the process. Again, confidentiality comes into play in that you can decide what to do with your trust’s assets. Certain personal details, such as social security numbers, can be redacted from documents that are public record to protect the personal information of loved ones during such a public process.
6) A living trust protects children/minors from being forced to go through guardianship hearings.
As previously mentioned, when someone dies without a living trust or testamentary documents in place, judges typically appoint a guardian to oversee all aspects of child-rearing until said minor reaches 18 years old.
This can be difficult for the newly appointed guardian, the child, and anyone else involved; especially when they’re required to meet complex requirements set by the court. Not to mention, if a minor is left with a single parent, they’re often denied custody of their siblings and other loved ones. A living trust eliminates the need for guardianship hearings to take place after your death and keeps your loved ones intact.
7) A living trust provides peace of mind.
We mentioned how difficult it could be to deal with loved ones passing away, but estate planning in advance will give you immense peace of mind. You’ll know that your family members are taken care of, as well as your personal finance, financial accounts, and remaining assets so you don’t leave any loose ends.
In short, the benefits of a living trust save families from going through months of paperwork, dealing with an attorney, law firm, legal fees, and legal disputes. Other benefits include avoiding unnecessary emotional turmoil after your death. Peace of mind also means that your loved ones won’t have to question what to do with your belongings.
By outlining everything beforehand, you ensure that nothing gets overlooked. Having a clear understanding and full control of what happens to all of your property, bank accounts, life insurance policies, investments, etc., helps alleviate confusion about where to start looking for instructions.
8)A living trust can help you leave an elegant legacy for future generations.
This may not have been what you had in mind during estate planning when you created your living trust, but having it sets a legacy and leaves your loved ones with a sense of pride and ownership rights.
A living trust is an enduring gift that can last for decades or centuries, long after you’re gone. Besides, you’ll have set an excellent example for your heirs. Your inheritance isn’t just cash, real estate, or stocks; it’s teaching loved ones to save, live within their means, about financial needs, and how to responsibly manage money. Kids are always watching adults to see how they handle themselves.
Living Trust Vs. Will
Is a living trust the same as a last will?
Well, many people have used these terms interchangeably in the past. However, the law has recently clarified that this is not true.
A will applies only to property you own at the time of your death. The property you acquire after that point will require probate instead of being distributed by a will.
On the other hand, if you put all of your assets into a living trust before you die, it can save them from going through the probate process. Plus, since a living trust doesn’t need to go through court for approval like a will does, it can be done much more quickly. This ensures that your property can be easily managed without delay or complication.
So, which is better: a last will or a living trust?
It depends on what you want to accomplish with your estate plan. If you’re looking for a way to ensure that all of your property passes smoothly from one generation to the next, then a living trust may be perfect for you.
On the other hand, if most of your property isn’t worth anything when you die and you don’t want anyone fighting over it when they don’t care about what happens anyway, then using a will might work better.
Additionally, a living trust comes in handy with regard to cost savings. When someone dies, and their property goes through probate court, there are often legal fees attached to the deceased person who cannot control their assets anymore. With a living trust, those fees are avoided because the property transfers outside of probate.
In addition to saving money, these costs also free up time for loved ones who are grieving during an already difficult time. Finally, living trusts offer more privacy compared to a last will.
All around you can see evidence of the importance of having a living trust. If you don’t have one, it means that your assets will be left up for grabs in the event of your death.
Additionally, if there are heirs who are minors when they receive their inheritance, they may not be able to manage it properly on their own. A living trust will ensure that everything goes as planned no matter what happens during life’s twists and turns.
One of the most important considerations while estate planning and creating a living trust is determining who should act as successor trustee. This person will be responsible for managing all affairs related to the property until it passes onto beneficiaries.
If you need help deciding who would make a good successor trustee, we recommend looking at family members first. They’re likely to understand your wishes best and be available to step in right away instead of waiting months or years before stepping into the role. That way, you can rest easy knowing that your assets will continue to grow and provide income for generations down the line!
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