Living trusts may be one of the most misunderstood of all estate planning tools, mainly because there are several common myths about living trusts floating around.
Here, we'll take a look at what a living trust is, some living trust basics, and why a living trust may be an important part of your estate plan.
What are the benefits of a living trust?
A living trust, also called a revocable living trust or living revocable trust, allows the person writing the trust (the grantor) to retain control over the trust property until death. The trust is then turned over to the successor trustee, who had been handpicked by the grantor, to distribute the trust property according to the grantor's wishes.
There are several benefits to having a living trust as part of your estate plan, including the fact that the trust often enables the assets contained therein to avoid probate. Depending on your state and the types of assets you own, avoiding probate can result in a faster, simpler, and less expensive process for distributing assets to the beneficiaries.
A living trust also helps ensure that your wishes are followed to the letter and it can maintain your privacy because a properly funded trust can avoid the probate process, which involves hearings that are public.
One last note: A revocable trust is called as such because it can be changed at any time by the grantor during his or her lifetime. An irrevocable trust, on the other hand, cannot.
Now on to debunking five myths about living trusts.
Myth 1: 'Living trusts are only for the wealthy.'
This is probably the most widely believed of the living trust myths, and, as you may already have guessed, it couldn't be further from the truth.
Yes, many wealthy people set up trusts—are visions of "trust fund babies" dancing in your head? But that doesn't mean that trusts are an estate planning option only for the rich.
But many people of average incomes find that the benefits of a living trust as described above can make them an advantageous choice for their estate planning.
Myth 2: 'Living trusts only benefit beneficiaries, not grantors.'
While many people create living trusts primarily to make sure the trust property goes to their heirs quickly and easily after their death, a living trust can also allow for easier handling of the grantor's affairs should he or she become incapacitated.
In such a situation, having a living trust in place can make things much less stressful and hassle-free for loved ones left to take care of your affairs while you are unable to do so.
Myth 3: 'Grantors can't access funds once those funds are in a living trust.'
This myth ignores the "living" part of the living trust. The truth is that the funds and assets in a living trust can be made as accessible as you wish—to you or to whomever else you desire.
Accordingly, if you want to use the trust primarily for your benefit, you can set it up so that everything in it is accessible to you until your death. Conversely, you can also make the funds inaccessible to those you don't want to be able to use them during your lifetime.
Myth 4: 'Living trusts always avoid probate entirely.'
By and large, the assets contained within a trust will usually escape probate, with one big caveat, and it's a great reason to make sure you have experienced professionals helping you set up your trust. If there are assets that were not in the trust, those will still have to go through the regular probate process.
This is why it is of the utmost importance that your trust is fully funded—with all of the assets you wish to pass on—to gain the full advantage of probate avoidance.
Myth 5: 'Creating a living trust is complicated and/or expensive.'
You can create a living trust easily by using online living trust forms. You can also hire a specialized estate planning attorney or another legal professional to draw up the documents.
Setting up a trust may indeed cost a bit more upfront than simply writing a last will and testament, but the potential cost savings later and the other benefits of establishing a living trust can make up for those expenses in the long run.
Getting ready to set up a living trust
Now that you've got the straight scoop on living trusts, if you're ready to move forward, you can make the process go even more smoothly by thinking about the following:
- The assets you would like to include in the trust
- Who you would like to receive these assets upon your death
- Naming your successor trustee
Note that if there are minor children who would be inheriting through the trust, you have the option to name someone to manage the assets for them until they reach the age of majority.