A living trust is a common estate planning tool when it comes to probate avoidance. Many 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 is a Living Trust?
A “living trust” is a specific type of trust that becomes effective during your lifetime, as opposed to only becoming effective after your death. Like other types of trusts, property transferred to a living trust will be held and managed by your trustee until it is time to transfer the trust property to your heirs.
What are the Steps Required to Create a Living Trust?
Now that you know the truth about living trusts, there are just a few straightforward steps required to create a revocable living trust. Your estate planning attorney will initially meet with you to determine what your particular needs are. From this, your attorney will draft the trust document which contains all of the terms of the trust. That is the instructions for the trustee to follow. After drafting the trust document, the property must be transferred or “funded” into the trust. It’s really that simple if you have the assistance of an experienced trust attorney.
How Can I Modify the Terms of My Trust?
Because a living trust is 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.
Who Controls the Assets in My Living Trust?
One great advantage of a living trust 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.
Disadvantages of Living Trusts You Should Consider
As with most things, a living trust also has its disadvantages. One disadvantage to using a living trust is that is generally more limited in its coverage than a last will and testament. That is because a living trust refers only to specific property – the property that was funded to the trust. In many cases, simply having a living trust by itself is not sufficient.
Many people select themselves as trustee of their living trust, 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 Not Help With Estate Tax Avoidance
Since living trusts are revocable, they cannot provide the benefit of reducing or eliminating estate tax liability. The reason is that a living trust you 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 an Attorney
Before deciding whether a living trust is 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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