A living trust is a legal document that allows you to establish an arrangement in which a third party (either you or someone else you choose) holds property for the benefit of another entity or persons. It allows you to control your assets during your lifetime and manage them after your death. This type of estate planning tool is typically easy to set up, offers the advantage of avoiding probate (public court approval) after you die, and provides flexibility in the distribution of your assets according to your wishes.
Knowing what a living trust is and considering one for yourself is an important decision. Here’s an overview of the history, basics, types, advantages and disadvantages to help you decide if a living trust is right for you.
History of Living Trusts
Living trusts have been used for centuries. The modern living trust was developed in England in the late 1600s. At that time, a landowner could use a trust to ensure that his or her land was managed by a trusted person in his or her absence. Since then, other elements of the trust have been used in countries around the world and were first applied in the U.S. In 1839.
Basics of Living Trusts
A living trust is an estate planning tool that allows you to set up and manage assets for the benefit of another person or entity. It’s a written document that establishes a legal relationship between a Trustor (the person creating the trust), a Trustee (the person or institution responsible for managing the assets in the trust and according to the terms of the trust), and the Beneficiaries (the person or persons designated to receive any benefits from the trust).
Types of Living Trusts
There are several different types of living trusts, designed to meet different needs and goals. Here are some of the more common living trusts and their uses.
Revocable Living Trusts: A revocable living trust, also known as an “inter vivos” trust, is one of the most popular types of trusts. This type of trust gives the Trustor control over the assets during their lifetime and allows them to change, amend or even revoke the trust any time they want.
Irrevocable Living Trusts: An irrevocable living trust is one in which the Trustor must give up all control of the assets held in the trust. Generally, the trust terms cannot be amended or revoked once it has been created. It’s important to note that this type of trust may have tax advantages, but only after the trust has been funded (assets added to it).
Testamentary Trusts: A testamentary trust is a trust created as part of a Last Will and Testament. This type of trust takes effect only after the death of the person who created the trust and is typically used to manage assets for the benefit of minor children or other family members when the creator of the trust may no longer be available to manage the assets.
Benefits of Living Trusts
Living trusts offer several significant benefits to their holders:
Avoid Probate: The biggest benefit of having a living trust is that it allows you to avoid the probate process. Probate can be a very lengthy and expensive process, but with a living trust, your wishes will be handled much faster and more easily.
Flexibility: A living trust allows you to make changes and amendments to the trust document while you’re alive. This allows you to fully customize the trust to your needs, so you’re able to ensure that your assets are managed the way you want them to be.
Ease of Administration: With a living trust, the administration of assets is much simpler and less costly than with a will. This makes it easier for a successor Trustee to manage your assets when you’re no longer able to do so.
Confidentiality: Living trusts are not public documents, so the disposition of assets upon death will remain confidential. This can be beneficial for people who want to keep their assets private.
Drawbacks of Living Trusts
It’s important to note that there are some drawbacks to creating a living trust. Here are some of the disadvantages that people may encounter by having a living trust:
Cost: Setting up a living trust can be a fairly expensive venture, especially if you use a lawyer to prepare or review the documents.
Time: Creating a living trust can be a lengthy process, depending on the complexity of the trustee document and other factors, such as having to sell real estate that needs to be transferred, or updating titles and deeds.
Maintenance: Once a trust is created, it must be closely monitored and actively managed in order for it to remain effective. This can be time consuming and costly, so it’s important to make sure that you’re comfortable with this prior to establishing a living trust.
Complexity: If a living trust is poorly drafted or managed, it can be difficult to understand and administer. This is why it’s so important to work with a knowledgeable estate planning attorney who can ensure the document is created properly.
Tips for Setting Up a Living Trust
If you decide that a living trust is the right tool for your estate planning needs, here are a few tips to help you get started:
Do Your Research: Before you establish a living trust, make sure you understand the implications and how it will work. Familiarize yourself with the different types of living trusts and speak with a qualified estate planning attorney to understand how each works.
Prepare a List of Assets: You’ll need to gather information about your assets, including their current value and any deeds or titles that you need to transfer.
Find a Qualified Trustee: You’ll need to select a trustee to manage the trust. This may be you, if you’re comfortable managing the trust, or it may be a bank, trust company or other financial institution.
Draft an Agreement: You’ll need to create a legal agreement that outlines the terms of the trust and describes how the assets will be managed.
Fund the Trust: You’ll need to transfer the assets into the trust. This typically involves changing the title and deed of any real estate that you’re transferring, as well as other financial transactions.
A living trust is a great tool for estate planning that allows you to manage your assets during your lifetime and ensure that they will be managed according to your wishes after your death. It can also help you avoid the probate process. But it’s important to understand the basics of a living trust, including the different types, the costs, the potential drawbacks, and the responsibilities that come with it. If you decide to set up a living trust, following the tips above can help you get started off on the right foot.
