When to Make a Living Trust

When to Make a Living Trust

by Brette Sember, Esq., April 2015

Living trusts are a very popular option for estate planning. However, the truth is that while many people can benefit from setting up a living trust, they aren’t the best choice for everyone. It’s wise to find out who needs a living trust before creating one.

What is a Living Trust?

A living trust is a legal document that transfers ownership of your assets into the name of your trust during your lifetime. You continue to use the assets as you normally would despite the technical name change. After your death, the assets continue to be managed by the trustee you named and are then distributed at the times you have chosen to your beneficiaries.

Big Benefits

A revocable living trust can provide you with a variety of benefits that may make it attractive. When you make a living trust, the assets in the trust do not need to go through probate (the court procedure that verifies and enacts a will). This saves months of time and also avoids court costs and attorney fees. Because the trust does not go through probate, it never becomes public record and so it remains completely private. The names of your beneficiaries and the assets you pass to them remain secret. Revocable living trusts offer flexibility since you can move assets in and out of the trust as you wish during your lifetime. Nothing is set in stone while you are alive. If you change your mind, you can easily alter or eliminate the trust.

When to Trust a Trust

There are several situations in which a trust can be very important and useful. Should you become incapacitated during your lifetime and unable to manage your own affairs, the trust will already be in place with a trustee managing your assets. You most likely won’t need to be declared incompetent and someone you have faith in will make decisions for you. This offers great peace of mind.

A living trust lets you pass your assets immediately after death and without interference if that is your goal. If you own a small business which will pass with your death, a trust can ensure there will be no interruption in ownership and management. The trust can also ensure your bank accounts are not frozen upon your death.

A trust allows you to control when and how your beneficiaries receive their inheritances. If you die using a will to pass assets, all of your assets will be disbursed once probate concludes. A trust allows you to control when those assets are disbursed, something that can be very useful if you are leaving significant funds to young adults (children or grandchildren) who may not be mature enough to handle a large sum of money at that point in their lives. You can disburse amounts at various ages throughout their lives, leaving the bulk of the funds in the trust, managed by the trustee, until they are mature enough to handle the responsibility.

When you ask do I need a living trust, another situation in which the answer is yes is if you think your will might be contested after your death. In particular, if you plan to disinherit a child, a trust allows you to ensure your wishes will be carried out without any court interference. If you do this in a will, it could be held up in court for years and eventually overturned. It may also allow you to disinherit a spouse, but the rules vary by state about this.

Is a Trust for Everyone?

Living trusts do not make sense for everyone across the board. There are costs associated with setting up a trust and in many situations, preparing a will and paying probate costs may be less expensive. If you are leaving behind a small estate, you will likely qualify for your state’s small estate probate procedure which is fast and inexpensive, making the expense of a trust unnecessary. If you are under the age of 50, a living trust may not be necessary yet, since it will involve years of management. If you plan to leave the bulk of your estate to your spouse, you may be better served using a specialized trust that makes this transfer while avoiding estate taxes. If you are concerned about estate taxes, and your estate exceeds the $5.4 million federal estate tax exemption or your state estate tax exemption, you may be better served focusing on estate planning measures to reduce your tax load.

To create a living trust you will need to complete and sign living trust forms that designate your trustee, beneficiaries, trust terms, and trust assets. A living trust can be a very useful tool as part of your estate planning package.

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