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What Is a Living Trust? Here's Everything to Know. Living trusts are essential options in estate planning. Keep reading to explore living trusts and whether or not they're the right option for you.

By Entrepreneur Staff Edited by Dan Bova

Opening a living trust is an essential option in estate planning. By understanding the different types of living trusts and the opportunities they provide, you may be inspired to open one. Read on for everything you need to know about living trusts.

What is a living trust?

A living trust is a type of trust created and funded while the grantor is alive.

The primary purposes of a living trust are:

  • To manage and distribute assets and trust property to named beneficiaries without probate court involvement.
  • To provide a smooth transfer of assets to named beneficiaries in the event of the grantor's incapacity.
  • To provide financial stability to family members through assets.

Related: What Is a Trust Fund and How Do They Work?

What types of living trusts are available?

There are several types of living trusts, each with unique features and benefits. However, the two main types of living trusts are revocable living trusts and irrevocable living trusts. Read below for more information.

Revocable living trusts

A revocable living trust is a trust that can be amended or revoked by the grantor at any time during their lifetime. This type of trust provides flexibility and allows the grantor to change the trust as their circumstances change.

A revocable living trust can be a helpful estate planning tool, as it can avoid probate, provide privacy and allow for the management of assets if the grantor becomes incapacitated.

Irrevocable living trusts

An irrevocable living trust is a trust that cannot be amended or revoked once established. This type of trust is often used for tax planning or asset protection purposes.

The grantor is no longer in control, and can't change any assets once they have been included in the trust without the beneficiaries permission.

Related: A Succession Plan Can Protect You, Your Family, and Your Employees. Here's How.

Who are the key players in the living trust process?

There are four key players in the living trust process, which include:

  1. Grantor: The grantor establishes the living trust and transfers ownership of their assets to the trust. The grantor may also act as the initial trustee, retaining full control over the trust assets and making decisions about how they are managed and invested.
  2. Trustee: The trustee is responsible for managing and investing the trust assets and distributing them to the beneficiaries according to the terms of the trust document. The grantor may serve as the initial trustee but can also appoint a successor trustee to take over in the event of their incapacity or death.
  3. Beneficiaries: The beneficiaries are the individuals or organizations named in the trust document who will receive the benefits of the trust. The named beneficiaries may receive income from the trust assets or an outright distribution of the assets.
  4. Attorney: An attorney can be involved in the living trust process by drafting the trust document and providing legal advice to the grantor on legal and tax issues related to the trust.

Related: Gift Deed Or Will: What Is the Best Way To Pass On Your Assets To Your Beloved?

How do living trusts work?

Creating a living trust is a process that can help ensure your assets are managed and distributed according to your wishes. Here are the typical steps involved in creating a living trust:

1. Decide how you want the trust set up. Is it a revocable or irrevocable trust?

The first step in creating a living trust is to decide how you want to establish the trust. A revocable trust can be changed or revoked by the grantor at any time, while an irrevocable trust cannot be altered or canceled without the beneficiaries' consent. It's essential to consider the benefits and drawbacks of each type of trust before making a decision.

2. Create a trust document including trustee designation and beneficiaries.

Once you have decided on the type of trust you want to create, the next step is to create a trust document. This document outlines the terms of the trust, including:

  • The trustee designation.
  • Beneficiaries.
  • Any conditions or restrictions on how the assets in the trust can be used.

3. Have the trust document notarized or signed by a lawyer.

A lawyer must notarize or sign a trust document for it to be legally binding. This ensures that the document meets all legal requirements and can be enforced.

4. Set up a trust bank account.

Setting up a separate bank account for the trust is recommended to make it easier to manage the assets in the trust. This can also help ensure that the assets in the trust are not commingled with personal or business assets.

5. Transfer all the trust's assets into the trust.

The final step in creating a living trust is to transfer ownership of all the trust's assets into the trust. This includes real estate, bank accounts, stocks and any other assets you want in the trust. Transferring ownership of these assets to the trust is now managed and distributed according to the trust document's terms.

Creating a living trust can be a complex process, and it's essential to consult with an experienced estate planning attorney to ensure that the trust is properly established and managed.

Related: 5 Ways to Professionally Manage Your Financial Assets

How is a living trust different from a will?

A will is a legal document that specifies how a person's assets will be distributed after their death and can be used to appoint a guardian for minor children. A will only takes effect after the person's death.

In contrast, a trust is a legal arrangement in which a trustee holds and manages assets for the benefit of the trust's beneficiaries.

With a living trust, the grantor transfers ownership of their assets to the trust while they are still alive, and the trust's terms dictate how the assets will be distributed after the grantor's death.

Why do people open living trusts?

There are several reasons people choose to open living trusts. Keep reading for more information on those reasons.

To avoid probate

Probate is the legal process that occurs after a person dies, during which the court oversees the distribution of the deceased person's assets.

By establishing a living trust, the assets in the trust pass directly to the beneficiaries named in the trust document without the need for probate court.

To continue control over asset management

A living trust allows the grantor to retain control over the management and distribution of their assets during their lifetime.

The grantor can act as the initial trustee, making decisions about how the assets are invested and managed. In the case of revocable living trusts, they can change the terms of the trust at any time. However, with irrevocable living trusts, the grantor needs the beneficiaries' permission to alter the trust terms.

To transfer assets in the event of incapacity

In the event of the grantor's incapacity, the successor trustee named in the trust document would take over the management of the trust and make decisions about the assets on behalf of the grantor.

This can help ensure a smooth transition of assets to the named beneficiaries and avoid needing a court-appointed guardian or conservator.

To ensure privacy

Because it provides more privacy than a will, individuals with significant assets or those who wish to keep their financial affairs private have more options and avenues to keep their information confidential instead of on the public record.

To plan for estate taxes

You can use a living trust as a tool for estate tax planning, as certain types of trusts can be structured to minimize estate federal estate tax liability.

This can help to preserve the value of the grantor's assets for their beneficiaries and minimize the impact of estate taxes on the overall estate.

To plan for loved ones with special needs

For a beneficiary with special needs, living trusts allow for the management of assets for their benefit without affecting their eligibility for government benefits.

To avoid contest

A well-drafted living trust can help avoid contests over a grantor's assets, as it spells out the grantor's wishes for the distribution of their assets.

This can help reduce the likelihood of disputes among named beneficiaries and ensure that the grantor's wishes are respected.

Related: Real Estate Management Could Be a Game-Changer for Your Income

Who can open a living trust?

Anyone with mental and financial capacity can open a living trust. There is no age requirement, although it is typically more common for older individuals to establish a living trust.

To open a living trust, you must have assets to transfer into the trust and have a clear understanding of your goals for the trust.

It is essential to consult with an attorney or a financial advisor when considering a living trust, as they can help you determine whether a living trust is appropriate for your situation and provide guidance on the legal and financial considerations involved in establishing a trust.

Related: Is Your Financial Advisor Right For You? Here's A Simple Test To See If It's Time To Move On.

What assets can be put in a living trust?

You can transfer most types of assets into a living trust.

Some common assets you can put into a living trust include:

  • Real estate: primary residence, vacation homes, rental properties and land.
  • Bank accounts: checking and savings accounts, certificates of deposit and money market accounts.
  • Investment accounts: stocks, bonds and mutual funds.
  • Business interests: partnerships, limited liability companies and closely held corporations.
  • Personal property: jewelry, art, collectibles and other valuable items.
  • Life insurance policies: whole life and term life insurance policies.
  • Vehicles: cars, trucks, boats and airplanes.

Related: 5 Ways Business Owners Can Use Trusts to Benefit Their Company

What are the pros and cons of a living trust?

A living trust can be a helpful estate planning tool, but it is essential to consider the pros and cons before deciding.

Pros of a living trust

  • Avoids probate: A living trust can avoid probate, the court-supervised process of distributing a deceased person's assets to their heirs. Probate can be time-consuming, expensive and public, while a living trust can help avoid these drawbacks.
  • Privacy: A living trust provides privacy, as the terms of the trust and the assets in the trust are not a matter of public record.
  • Assets management in incapacity: If the grantor becomes incapacitated, the assets in the trust can be managed by a successor trustee without the need for a court-appointed guardian or conservator.
  • Control over the disposition of assets: The grantor can dictate how their assets will be managed via the trust's terms after death.
  • Flexibility: A revocable living trust can be amended or revoked at any time by the grantor, allowing for changes in their circumstances.

Related: The Importance of Estate Planning When Building Your Business

Cons of a living trust

  • Cost: The cost of establishing a living trust can be substantial, including attorney fees, trustee fees and the costs of transferring assets into the trust.
  • Complexity: A living trust can be a complex legal document. Working with an attorney with experience with living trusts is vital to ensure the trust is properly established and funded.
  • Ongoing maintenance: A living trust requires constant maintenance, including annual tax filings, the appointment of a successor trustee and periodic reviews of the trust's terms.
  • Permanence: Once an irrevocable trust is established, it cannot be amended or revoked. This lack of flexibility can be a drawback for some people.
  • Transferring assets into the trust: Transferring assets into the trust can be a time-consuming and complicated process, and it is crucial to work with an attorney to ensure that all necessary steps are taken.

Related: Why is Estate Planning More Important Now Than Ever Before?

What do you need to know about living trusts?

A living trust is a valuable tool for estate planning, as it can benefit beneficiaries.

By transferring ownership of assets to the trust while you're still alive, you can ensure that your assets will be distributed according to your wishes without the time and expense of the probate process.

If you think you are ready to set up a living trust, be sure to work with an estate planning attorney or financial advisor to determine the best type of trust for your needs and goals.

If you want more information about financial planning, retirement planning, investments and more, visit Entrepeneur.com.

Entrepreneur Staff

Entrepreneur Staff

Editor

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