5 Benefits of Living Trusts

A living trust is a legal document that is used in estate planning to manage your assets during your lifetime and distribute them after your death. Here are five common reasons why you could benefit from a living trust.

If you need help planning your estate, a financial advisor can walk you through different steps to protect your assets for your beneficiaries.

How Do Living Trusts Work?

A living trust will allow you to manage and transfer your assets to your beneficiaries after your death. In order to do this, you must establish this trust during your lifetime. As a legal document, it will set the rules and provisions to govern your assets. And, because these can be complicated, you may want to work with an estate planning professional to ensure that your trust is set up correctly.

Once you have completed the setup, you will then decide which assets you want to include in the trust and transfer the title for those to the trust. Your assets will be managed by a trustee, who is a person or an entity that you will appoint. You can serve as your own trustee, but you’ll want to appoint a successor trustee who will take over when you pass away.

Additionally, you will also have to designate your beneficiaries, and the trustee will have a fiduciary obligation to manage the trust in favor of their interests.

5 Benefits of Setting Up a Living Trust

A living trust can be a powerful asset protection and tax planning tool. Here are five reasons why you may want to consider establishing one:

1. Avoid probate. A living trust will allow you to transfer assets legally to your beneficiaries without having to undergo a costly and lengthy probate process in which a court will recognize a will and appoint an executor or representative to administer the estate.

2. Protect your privacy. Probate is a public process, which means that anyone can access estate files through the court. And because living trusts are not public records, assets held by this legal arrangement will be kept private. This will help shield your beneficiaries from public scrutiny and avoid disputes with family members.

3. Get more flexibility and control. As the creator of the trust, referred to as the grantor, you will be able to maintain control of your assets, even after completing the setup. This means that you control investments and reacquire them, replace the trustee and revoke or amend the trust, among other powers. You will also have greater flexibility when transferring the ownership of property, either to be managed by a third party or get distributed to beneficiaries at any time.

4. Plan for incapacity. In the event that you become seriously ill and are unable to manage your assets, a designated trustee could take over the trust and ensure that the rules and provisions that you have set up are maintained without interruption. This could also shield you from getting a court-appointed guardian.

5. Minimize your estate taxes. A living trust will not directly help you avoid income taxes. As a grantor, the IRS will treat you as the owner of the trust and must therefore report income that is earned from assets in the trust. Similarly, a trust will not avoid estate taxes either. But, if you name a charitable organization as a beneficiary of your living trust, whatever is designated for that charitable organization will be distributed to the charity free from estate taxes.

Click Your State to Get Matched With Financial Advisors That Serve Your Area

Choose your state and answer some questions to get matched with up to three fiduciary advisors that serve your area.

Getting a Living Trust vs. a Will

Both a living trust and a will are legal documents designed to help protect your assets. But, while a will provides specific instructions to distribute your property after death, a living trust can allow you to transfer ownership in your lifetime. Depending on the needs of your estate, a will may be sufficient. Just keep in mind that many estates can still enter probate court to verify a will, making your property a public record.

However, living trusts fall short of wills in one important area: naming guardians for children. If you have minor children, you’ll want to draft a will and appoint the person or people you want to care for your children in the event of your death. You cannot name guardians for children through a living trust.

What Assets Can You Put in a Living Trust?

A living trust only covers assets that are transferred into it. This generally means changing ownership of the property from your individual name to the name of the trust.

You can typically place a home, other real estate, bank accounts and taxable investment accounts in a living trust. Each asset must be properly retitled so that the trust becomes its legal owner.

Retirement accounts such as 401(k)s and IRAs are generally handled differently. These accounts typically remain in your name and pass according to their beneficiary designations. Life insurance proceeds can similarly go directly to the beneficiaries named on the policy.

Funding the trust is an important part of the process. Creating the trust document alone does not transfer ownership of your property. Assets that remain outside the trust could still go through probate unless they pass another way, such as through joint ownership or a beneficiary designation.

Reviewing how each asset is titled can help confirm that the property you intend to place in the trust has actually been transferred. This can prevent assets from going through probate simply because the ownership records were never updated.

Bottom Line

A living trust can help protect your privacy by avoiding probate and provide instructions for transferring assets to beneficiaries while allowing you to maintain control over your property during your lifetime. When setting one up, consider the costs and whether professional guidance could help you structure it around your estate planning goals.

“A living trust can be especially appealing to someone who has very specific wishes for their assets, whether it involves donations to charity or bequeaths to heirs. A trust allows for customization and flexibility while the owner of the assets is alive and provides specific rules and guidance after their death,” said Tanza Loudenback, CFP®.

Tanza Loudenback, CFP® provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Tips for Estate Planning

A financial advisor can walk you through the complicated steps of setting up a trust. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Estate planning involves more than just protecting your assets. Advance directives are legal documents that enable individuals to retain control over their health care decision, if they become incapacitated. Here’s a comprehensive guide on advance directives for healthcare.