How Does a Living Trust Work?
A living trust is one of the most efficient estate planning tools available but there are some common misconceptions. According to a survey made by Caring.com only 42% of responders have created or prepared an estate plan.
There are three reasons why someone may put off their estate planning:
- They’re procrastinating.
- They don’t know how to do it.
- They believe they don’t have enough assets.
While these are understandable, it is in your best interest to start creating your estate plan today. Most of my clients establish revocable living trust centered estate plans because they provide a litany of benefits including flexibility, asset protection, privacy, and avoid the exorbitant expense of probate court.
1. What Is a Living Trust?
A living trust is a legal document created during an individual’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of beneficiaries. A living trust’s primary purpose is to avoid probate and/or to provide asset protection.
2. Why Establish a Living Trust?
Aside from protecting your assets, living trusts serve many purposes. My clients use living trusts to avoid probate, plan for incapacity or death, and to distribute their property quicker, faster, and cheaper as compared to probate.
I recommend to my clients that they include a pour-over will to catch any assets left out of the trust, although your main goal should be to put as many assets in as possible.
3. What Is Probate?
Probate is a legal process supervised by a court of law where it validates your will and determines how it is going to distribute your assets to your beneficiaries. Probate can be an expensive and time-consuming process before your beneficiaries get access to the assets.
Most people prefer to avoid probate since it can lead to confusion, stress, and more legal fees. In these cases, having a living trust can ease some of the complications in the process since assets in a trust do not have to go through probate.
4. What Assets Can You Put into a Living Trust?
You can place several asset categories in a living trust, such as the following:
- Real estate
- Fine art
- Intellectual property (digital property)
- Mining rights
- Cars or other vehicles
- Bank accounts
5. How Does a Living Trust Work?
The process of creating a living trust is not as complex as it may seem; it just takes good guidance to get everything in order.
First, the person who establishes the trust is called the “grantor.” In this case, you, as the grantor, would transfer ownership of your property into the trust. During the trust creation process, a trustee is appointed. The trustee is the person responsible for managing the trust in the best interest of the trust’s beneficiaries.
Once you become incapacitated or die, the trustee ensures all the assets are distributed according to your wishes. Since a living trust can avoid probate, the assets may reach the intended beneficiaries much faster.
6. What Are the Two Main Types of Living Trusts?
- Irrevocable Trusts: In an irrevocable trust, you are giving full control over your assets to your trustee, and you cannot change an irrevocable trust’s terms without a judge’s permission. The benefits of this trust type include reducing the taxable estate.
- Revocable Trusts: As opposed to irrevocable trusts, you can adjust, amend, or cancel a revocable trust at any time during your life as you consider appropriate. You may also name yourself as the initial trustee to keep controlling your assets while you’re living.
The grantors of the revocable living trust (e.g., you and your spouse) are almost always the initial trustees. That is, you act as the grantor (creator) of the revocable living trust and the initial trustee. Upon your death, the surviving spouse serves as the remaining trustee and finally upon the survivor’s passing a secondary trustee (named in the living trust) will serve as trustee.
7. What Are the Advantages of Living Trusts?
Some of the most important advantages of having a living trust include the following:
- More privacy to your assets since living trusts are not considered public records.
- More difficulty to contest than a will.
- Saved time and money since assets in your trust do not have to go through probate.
8. Are Living Trusts Different than Wills?
Living trusts tend to be confused with last wills. A will is an individual’s written declaration of his or her wishes about the transfer of his or her property after death. A will’s primary function is to pass your property to people that you choose. A will also ensures that there are guardians for your minor children.
A will won’t, by itself, allow you to bypass probate. In California an estate worth $150,000 is subject to probate.
There are some scenarios where a will may suffice.
- You have minor children and your primary intention is to merely arrange for guardians.
- You do not own a home or real estate
- You are not concerned about the cost of probate, or your estate is smaller than the probate limit ($150,000 in 2021)
- You require the assistance of a judge to determine complex creditor issues.
For a young couple with no assets and a baby a will may be fine. Once the couple buys a house, starts investing, and gets more assets a more comprehensive revocable living trust centered estate plan will be a better fit.
9. What Do You Need to Begin Creating Your Living Trust?
You should complete a list of your assets and beneficiaries then contact my office immediately for a consultation. My team and I make the estate planning process a breeze and I offer a 100% satisfaction guarantee.
Establishing a living trust centered estate plan will help you protect your assets, keep the transfer to your beneficiaries private, and ensure they get to your family sooner than later.
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