One of the biggest misconceptions surrounding living trusts is that only wealthy people need a living trust. However, a living trust is an estate planning tool that can benefit many different people, even those without a high net worth.
Here is a look at what a living trust is, how it works, and who might consider setting one up when planning their estate.
What Is a Living Trust and How Does It Work?
As the name indicates, a living trust is a trust set up when a person is alive. The trust grantor (the person creating the trust) transfers assets to the trust and designates beneficiaries to receive the assets upon the grantor’s death or incapacitation.
Most types of assets can be put into a living trust – from real estate to investment accounts. However, some assets must follow a few rules, and others might be left out of a trust. Depending on how the trust is established, the trust grantor or a designated trustee manages the trust assets.
Upon the grantor’s death or incapacitation, assets are distributed to the designated beneficiaries according to the grantor’s instructions stated in the trust agreement. A living trust does not have to go through the court system before the distribution of its assets.
What Are the Types of Living Trusts?
A living trust can be revocable or irrevocable.
With a revocable living trust, the trust grantor can also be the designated trustee allowing the grantor to retain control of the trust assets. The grantor can amend the trust, change beneficiaries, and undo the trust at any time.
With an irrevocable trust, the trust grantor relinquishes control of the assets in the trust, and ownership effectively passes to the designated trustee. Once finalized, an irrevocable living trust cannot be undone, and can only be amended in limited ways and under limited circumstances.
Another primary difference between the two types of trusts is how taxes are handled. Taxes are a primary reason to consult a financial professional when deciding between a revocable or irrevocable living trust.
Who Might Benefit From Establishing a Living Trust?
People set up living trusts for many reasons. These are some of the primary reasons:
- To provide for disabled or minor beneficiaries.
- To protect assets in remarriage or divorce.
- To specify instructions on when and how a beneficiary will receive assets.
- To ensure a trustee is ready to step in and manage their finances in case of illness or injury.
- To allow heirs to avoid the probate process upon their passing.
- To avoid having assets become part of the public record after their passing.
Determine Your Need for a Living Trust
Many people create a living trust to make settlement of their estate easier for their loved ones after their passing. An improperly established trust will not achieve this goal.
Setting up a living trust can be complex and is best handled by an experienced attorney and financial professional. They can evaluate your financial circumstances, advise you on the type of trust that makes the most sense for your situation, and then ensure it is set up correctly.
The Law Offices of Lawrence Israeloff can help. As an experienced attorney and certified public accountant, Lawrence Israeloff consults on trusts and estate planning. Call us today to discuss whether a living trust is right for your unique circumstances or if you need assistance with any estate planning.
