Living trusts are a specific type of trust that is effective during your lifetime, unlike other trusts that only become effective after your death. However, like all other types of trusts, the property that you transfer to a living trust will be held and managed by your chosen trustee until it is time to transfer the trust property to your heirs after your death.
Why Living Trusts are so Popular?
A living trust is a favorite among clients when it comes to probate avoidance. Most clients are seeking ways to avoid the lengthy and expensive court proceeding. In the absence of a trust or some other estate planning tool, estates are required to go through probate. However, before you choose a living trust for your estate plan, you should be familiar with the advantages and disadvantages of this popular estate planning tool.
What are the Advantages of Living Trusts?
Of course, the first big advantage of having a living trust is avoiding probate. Living trusts help avoid the time and expense of probate. They also several tax advantages, including lowering the potential for estate taxes. A living trust allows for more privacy than a will, for instance, which must go through the probate process, which is a public proceeding. Living trusts provide more legal protection than a will, as well.
Living Trusts Provide More Legal Protection than a Will
Another advantage of using a living trust is that it provides certain legal protections that other estate planning tools do not. A living trust is a legal document that is enforceable through the court system, just like a contract. That means, if there are any challenges to asset transfers or disputes, the court will enforce the terms of the trust document.
The Terms of Living Trusts Can be Modified
Because living trusts are revocable, you retain the ability to make changes to the terms of the trust, at any point during your lifetime. In fact, it is strongly recommended that you periodically review the terms of your trust to determine if it needs to be revised. Generally speaking, your living trust should be reviewed anytime there are significant changes in your family or financial situation. For example, the birth of a child or grandchild, marriage or divorce, and the death of a beneficiary are all life events that trigger the need for review.
You Can Still Control the Property in your Living Trust
One great advantage of living trusts is that you can designate anyone you choose as trustee, including yourself. Indeed, in most cases, people name themselves as trustee of their living trust so they maintain complete control of their property. You can continue to buy and sell assets, as well as remove assets from the trust whenever you choose. Additionally, if you are married you also have the ability to designate your spouse as co-trustee. In order for the trust to continue to operate after your death, you must designate a successor trustee to take over management of the trust upon your death.
Some Disadvantages of a Living Trust
As with most things, living trusts also have their disadvantages. In many cases, simply having a living trust by itself is not sufficient. Many people select themselves as trustee of their living trusts, so they can retain control over their property during their lifetime. Yet, the successor trustee you select, the person who takes over after your death, may not have the authority to manage any property that you did not include in the living trust before your death. In order to include those assets, you would likely need a power of attorney, as well.
Living Trusts do no Provide Estate Tax Avoidance
Since living trusts are revocable, they cannot provide the benefit of reducing or eliminating estate tax liability. The reason is that living trusts can be changed any time, the property technically still belongs to you instead of the trust. So, it remains a part of your estate. Living trusts do not provide asset protection for this same reason.
Consult with a Living Trust Attorney
Before deciding whether living trusts are right for you, consult with a living trust attorney to discuss your options. Though creating a living trust basically requires transferring the title or ownership of your assets to the trust, the provisions of the trust agreement need to be properly drafted. For that reason, it is best for you to seek legal advice.
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