Living Trusts: What Are They, Types, and Their Pros and Cons

If you are curious about the concept of a living trust, let us provide you with a comprehensive explanation. Our goal is to ensure that you are well informed about your alternatives before making any decisions.

A living trust is a legal arrangement established by an individual (known as the grantor) during their lifetime to safeguard their assets and guide their distribution after the grantor's demise.

It is a valuable tool for estate planning, enabling family members and beneficiaries to bypass a lengthy, public, complex, and potentially expensive probate process.

The living trust is documented and outlines the terms of the trust and the assets assigned to it by the grantor. Additionally, the grantor designates a trustee, who will eventually oversee these assets for the benefit of the beneficiaries.

Types of Living Trusts

There are two main types of living trusts: revocable and irrevocable.

1. Revocable

A revocable living trust is the most common type of living trust. It is a trust in which the person who creates it (the grantor) maintains control over the assets placed within the trust. At the time of the trust's creation, the grantor can designate themselves as the trustee and have the power to change and amend trust rules at any time. They are free to change beneficiaries, remove assets, change trustees, or terminate the trust as they see fit.

Revocable living trusts are often used to protect the assets of the grantor should they become ill or otherwise unable to control them. In such a situation, the successor trustee will make decisions for the grantor. Revocable living trusts often become irrevocable upon the creator's death.

Taxes owed on assets in a living revocable trust are still paid by the grantor (while living). However, tax rates don't increase just because assets are placed within the trust.

2. Irrevocable

With an irrevocable living trust, the trust itself becomes the owner of the assets and the grantor is unable to designate themselves as the trustee. As a result, the grantor gives up certain rights of control over the trust, with the trustee assuming the role of the legal owner.

Once an irrevocable living trust is established, the named beneficiaries are set, and the grantor has limited ability to make changes to the agreement. Trust provisions can only be modified in specific situations, which may even require court approval. It's important to note that assets assigned to an irrevocable living trust cannot be taken back.

There are several advantages to having an irrevocable living trust. One meaningful benefit is that it offers protection for the assets within it, shielding them from lawsuits and creditors. This aspect makes irrevocable living trusts particularly valuable to professionals who may be susceptible to litigation, such as doctors or attorneys.

Pros and Cons of a living trust

A living trust is an effective estate planning tool that gives you the ability to retain control over your assets while you're alive and makes it easier for your family to distribute your estate after your death. However, like most things, it has its advantages and disadvantages.

Advantages

• Living trusts provide grantors with peace of mind as their loved ones can bypass the probate process when settling the estate.
• The distribution of assets after death can occur smoothly, quickly, and without court costs.
• If you're unable to manage the trust's assets, your successor trustee will take over.
• While you still pay taxes related to the assets in a (revocable) living trust, the tax rate doesn't increase.
• Living trusts can keep information relating to your estate private.
• Living trusts have the potential to protect your estate against creditors and legal challenges.

Disadvantages

• A grantor loses ownership of, and control over, assets placed in an irrevocable living trust.
• To transfer ownership of assets to the living trust, it is necessary to undergo a legal process to change the title of the assets, including real estate.
• Title transfer involves filing fees to register title changes.
• The creation of a living trust may require the help of an estate lawyer, which also has costs.
• Typically, a living trust does not provide significant tax advantages unless it is irrevocable and helps to decrease the grantor's taxable estate. In such cases, taxes may be owed on the income generated by assets and on property.

Living Trust vs. Will

A living trust is a legal document that enables you to choose who will receive your assets after your death, and appoint a trustee to manage and distribute them accordingly. The trust also helps your family bypass the probate process for assets distributed by the trust, and other related estate matters.

While some individuals opt for a living trust solely to avoid probate, it is important to note that creating one can be more complex and expensive than drafting a will. Additionally, it requires the presence of a notary public.

A living trust cannot appoint an executor for a will or designate guardians for minor children. As a result, individuals who have living trusts typically create a will as well.

Will

A will is a legally binding document that appoints an executor to carry out your wishes after your passing. It provides instructions on how your assets should be distributed by the executor, designates guardians for minor children, and includes details regarding the payment of debts, taxes, debt forgiveness, and funeral arrangements.

The administration of a will, including the distribution of assets, involves the court-supervised process of probate. Probation is known to be a time-consuming and potentially expensive procedure. Furthermore, matters related to a will become public once they are brought before a probate court.

A will is a relatively simple document to create and less expensive than a living trust. It requires witnesses but not a notary public and takes effect upon death or incapacity.

How to Create a Living Trust

Getting help from an estate lawyer to create a living will is a smart decision. Here are the general steps you need to follow.

1. Determine whether you want a revocable or irrevocable trust.
2. Designate your beneficiaries and decide on the distribution percentages. Name a trustee who will be responsible for administering the trust after you pass away.
3. Work with an estate lawyer to complete the living trust document, review it, and sign it in the presence of a notary public. 
4. You'll need to fund it with the assets you've selected. It's crucial to keep the original living trust document stored securely, such as in a safe deposit box at your bank. 
5. Check the contents and inform your trustee of its location and how to access it when needed.

FAQs About Living Trusts

These are some of the most common questions individuals have about this topic. It's important to analyze both the legal and tax aspects to get the greatest benefit.

Is a Living Will the Same As a Living Trust?