A simple legal tool, known as a living trust, can help your heirs avoid the stress of a probate process. Also known as the inter-vivos trust, this document serves several benefits. However, its absence can lead to a chaotic distribution of assets. As an estate owner, imagine your heirs having to involve the courts to share your assets after you die.
We know how embarrassing, time-consuming, and expensive this situation can be. However, if you care about your beneficiaries, you can allocate your valuables on time using a trust. This article will provide insight into this legal document.
What is a living trust?
A living trust is an estate planning document a grantor creates in their lifetime to ease the transfer of assets to their heirs when they pass away. Through this document, you state clearly the terms of the trust and the assets they will receive.
Afterward, you will assign a trustee whose fiduciary duty is to manage the assets until they are transferred to the beneficiaries. Here’s how it works.
How does a living trust work?
For this purpose, you need to contact the best hands, including your financial officer, accountant, and legal professionals, to draft a document with explicit instructions. An estate planning professional should also be involved in creating a living trust.
To begin, they include the list of assets you have and transfer their title to the trust you choose. Aside from real estate property, other assets like jewelry, antiques, businesses, and investments can be designated to a trust.
You can also include all financial accounts except IRAs and 401k because the IRS views the change of title as early withdrawals.
Once a grantor passes away, the trustee transfers his assets to the beneficiaries of the trust. This distribution must follow the instructions and wishes of the document.
Types of living trust
- Revocable: This trust offers flexibility and allows the grantor to control the document. As the trustee, a grantor can amend the trust and effect changes at any time. They have the power to change trustees and beneficiaries and reassign assets.
Normally, this type is created when an individual is ill and may eventually become indisposed, so they can choose to terminate the trust later.
More so, there is no increase in taxes for assets on this trust, but all taxes the grantor owes on assets will be paid while he lives. It is the most common trust and can quickly become irrevocable if the grantor dies.
- Irrevocable: With a single line stating a no-amendment rule in this document, it becomes an irrevocable trust. Here, the creator has no power over the trust once he signs to the trustee. Once he relinquishes power, there is no room for amendments except with court involvement.
Advantages of a living trust
- Avoids probate: With a trust, there’s no need to sit through legal proceedings or even pay the fees involved. You can distribute assets out of court.
- Preserve assets: A trust secures your wealth even in incapacity. It provides safety until the time of transfer.
- Offers privacy: A grantor’s wishes are kept private even in their death. Unlike wills, these records are not exposed to the public.
Other benefits include;
- Smooth designation of property
- No increase in taxes
- Repels creditors and lawsuits
Disadvantages of living trust
- Incurs cost: From creation to amendment, if need be, you will spend money. Changing titles may cost you
- Lose control: You relinquish ownership of your assets with an irrevocable trust. One must be careful before using this type to avoid regrets.
- Tax consequences: A living trust offers no tax benefits, and beneficiaries will pay taxes owed on assets. However, you can still avoid an increase in taxes with a revocable trust.
Conclusion
Finally, a living trust is different from a will. While a will becomes effective after death, a living trust takes effect in a grantor’s lifetime to ensure wealth security and effective distribution after they pass away.
