Future goals of making an estate plan now include avoiding probate later, as well as keeping estate taxes at bay. What most people don’t realize is that estate planning can be useful while they are still alive. One way of maintaining control of your assets, while still providing for loved ones after your death, is to contact a legal professional about creating a living trust.
What’s a Living Trust?
Living trusts are a legal construction. They are designed to hold your assets—your income, possessions, and real estate—in a protected entity. Once the trust holder dies, the trust dissolves, and the remaining assets are distributed according to the pre-established wishes of the owner of the trust. Trusts can also hold businesses and assets that the trust holder would like to shield from creditors, aggressive litigators, and estranged family members. The trust owns all the assets placed in it. They no longer belong to the person who put them there (you) – although you do retain control over them as long as you are alive.
Those who would like to keep their final arrangements as private as possible might prefer a living trust to a last will and testament. Wills must be registered, and the information within is therefore available to the public. That’s why the media is often in possession of a will quickly after a celebrity dies. But trusts do not need any court registration. No one needs to know what your assets are or how you’d like them distributed.
No one wants to endure the probate process. Probate takes place when the validity of a person’s will is in question, and the courts must assess and distribute the contents of a person’s estate. This can take many months – sometimes over a year – and is an added frustration and emotional burden during a time of grief. It can also diminish the amount of assets left over for beneficiaries. Pre-planning with a living trust can help avoid probate.
Living Trusts & Trustees
When you have a trust, you have control over what you own both before your death as well as during the disbursement process. Trusts require trustees. A trustee is a person who is given the ability to oversee management of the trust. The person who created the trust (also called the “trustor” or “grantor”) can act as the trustee in most states, but the trustee must report any income on a trust on federal or state taxes. Outside institutions such a financial institution or trust company may also become trustees.
Trustees can be appointed to take control of the contents of the trust in the event the grantor becomes incapacitated. The trustor can also decide what the definition of “incapacitated” is—such as mental frailty, unconsciousness, or even brief surgery. The trustee would then make financial decisions regarding the trust. This can involve the sale or management of real estate, transactions within investment accounts, and the payment of debts.
Living trusts are an especially good option for those with minor children. The trust can release the assets to the child at whenever age the trustor decides – 18, 21, or any time the grantor sees fit. Trusts can also be created as education funds for grandchildren and require that the money be disbursed only for that purpose. The grantor can even choose to cover specific aspects of education, such as tuition and book fees, for example, but not travel or student activity dues.
Why a Trust?
Not only does a living trust help you to avoid probate, it ensures that you are able to distribute your assets as you’d like. The probate process means that judges will make these decisions in your stead. If, for example, you’d like to leave a certain percentage of your estate to a favorite charity but your children disagree with this, enumerating your decisions in the trust will ensure that your wishes are followed. Avoiding probate also means that court costs will not diminish your estate: The cost of setting up the trust will be limited and discussed up front.
Establishing a living trust is best accomplished with the help of a qualified attorney. A legal professional can help answer your questions for your specific financial situation, family structure, and state laws. Consulting a financial advisor about how to fund the trust is also a wise decision.
Trusts are most often used to protect large assets rather than sentimental items. Although you may have many items which might be worth a great deal to your beneficiaries, they may not hold a lot of financial value. If you own a business, investment properties, retirement accounts, or a well-funded savings account, a trust is a good idea.
How They Differ From a Last Will and Testament
As you now know, wills must be registered with your local district court. They become public knowledge after your death, while trusts remain private. There are a few other differences to know about before you establish one or the other.
Living trusts go into effect immediately, after notarization and signing. They then cease to exist upon your death. Wills, conversely, are not activated until after your death. The absence of a will can mean a court-appointed executor, guardian for your children, and distribution of your goods according to state laws. The lack of a trust does not exactly necessitate any of this, especially if you have a will to clarify the distribution of your estate.
The main purpose of a last will and testament is to transfer assets from one person to another. Trusts, however, enable a person to live as he or she otherwise would, with the knowledge that he/she can access the contents of a trust for travel, medical care, investments, or gifts.