When it comes to estate planning, living trusts are an incredibly reliable tool for ensuring that your estate is protected against probate, and ready to pass into the hands of your loved ones. However, setting up a living trust takes a little time, and a few resources.
Let’s go over the basics of setting up a living trust. You can do it in just five painless steps:
- Create an inventory of your assets, and what you want to fund into the trust.
- Prepare the paperwork for funding your assets into the trust – that is, ownership documents etc.
- Figure out who your beneficiaries are going to be, what they will receive, and who oversees the process.
- Create the living trust document.
- Fund the trust.
At its core, creating and utilizing a living trust is simple, if you’re sure that it’s what your estate needs. But the beauty in using a living trust lies in its flexibility and utility – which is where things get complicated. Templates are not a good idea – each trust must be built to suit specific needs, preferably through the hands of an experienced attorney.
Do the Prep Work
The set up for a living trust can be broken down into five succinct steps but doing it all yourself is not recommended. While a lot of legwork can be done solo, the drafting of a trust document is best left to a professional. Templates nowadays come close to being solid alternatives, but a proper trust document cannot simply be a copy-paste template off the Internet.
Most templates utilize a generalized language and avoid getting into specifics to be as applicable as possible across state lines. The nuances for creating a trust in Delaware are different than the nuances for trusts in California.
Something as simple as a generalization, clerical error, or error by omission can lead to expensive legal complications once the time comes for your trust to distribute your estate to your beneficiaries. Often, the first step is to find a qualified estate planning professional in your area.
After that, consider your options. Living trust come in many shapes and sizes, according to different needs. You can also set up several trusts, as per your wishes. While one trust can be set up to distribute your assets to your eldest children, if you have a younger child or someone with special needs, a trust can be created for them with special terms to help manage the money for them. Charitable trusts can be created to help give back to others, and for the tax benefit of reducing the size of your taxable estate. Irrevocable asset protection trusts completely remove assets from your control, to safeguard your assets for your children against creditors.
Once the plan has been laid out, it’s time to work the five important steps below.
1. Create an Inventory
Know first what you are going to fund into your trusts. Go through every asset in your name and find out how you’re going to account for everything. It helps to make a list of where your different assets are, for a future trustee to arrange the physical distribution of vehicles and know the location of each real estate property.
If you own assets in different states, do not worry. While probate laws differ in other states, once a living trust is created in the state in which you reside, it is honored even if you move to a different state. However, before you move, inquire if the state you’re moving to requires that you register your trust there.
2. Prepare the Paperwork
Before a trust can be completed, everything the trust document mentions must be renamed to link back to the trust, rather than to you. If you own a home, then you must change the deed on the property to reflect that it is part of your living trust. Property in a revocable living trust is still under your control until you pass away.
3. Assign Beneficiaries and Trustees
The major human components in a trust are the trust’s grantor (you), succeeding trustee (the person assigned to handle the trust when you pass away), and the trust’s beneficiaries. All must be named within the trust document, which must be signed by you or by a legitimate proxy in front of witnesses. There are certain properties and assets that do not have to be funded into a trust. Life insurance accounts, retirement accounts, and assets with transfer-upon-death/payable-upon-death beneficiaries do not pass through probate, passing straight to said beneficiaries instead.
4. Draft and Create Your Living Trust Document
A trust document is best drafted with the help of a legal professional, to ensure no mistakes are made. While these documents can be pricey, they often a bargain compared to the cost of an illegitimate or incomplete living trust. Once a trust document is completed, it must be signed and notarized to be valid. Some states do not require the public registration of trusts, but witnesses are necessary to ensure a trust document’s authenticity.
5. Fund Your Trust
The final step is to fund the trust. This involves signing everything over to the trust’s name, going through the paperwork you have accumulated to ensure that property belongs to the trust now, rather than directly to you. Assets in a revocable living trust still count as part of your estate, for tax purposes.
Use a Trust and a Will
As mentioned previously, living trusts are primarily used for more complicated estates to avoid the probate process and streamline inheritance. Estate planning is meant to simplify things as much as possible, and while a will is simple to make, it is often too limited for most larger estates. Taking full advantage of a living trust, on the other hand, can save time and money despite the upfront cost.
However, there are still uses for a will, even when trusts are involved. Estate planning rarely involves just a single document, especially where several large assets or a larger family are involved. A pour-over will can ensure that, if you acquire new assets and do not have the time to include them in your next estate planning update, said assets would pour over into your trust rather than passing through probate.
Estate plans are created to suit individual needs, so flexibility is of paramount importance. However, that also means that many variables need to be accounted for to create a proper and functioning estate plan. Even if you choose to do most of the legwork, consider hiring a professional living trust attorney who specializes in thoroughly reviewing these types of legal document(s).