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What is a Living Trust?

A living trust is a legal arrangement created by an individual, known as the grantor, during their lifetime to protect their assets and ensure their distribution after death. It is an estate planning tool that helps family members and beneficiaries avoid a lengthy, public, complex, and sometimes costly probate process.

Creating a Revocable Living Trust

Creating a living trust requires the assistance of an experienced estate planning attorney. A qualified attorney can help you navigate the legal complexities of creating a living trust and ensure that it meets all of your needs.

How Living Trusts Work

A trustee manages and transfers assets to beneficiaries through a living trust. Additionally, an experienced estate planning professional can help establish a trust instrument with proper setup. Furthermore, the grantor decides which assets to transfer to the living trust. Moreover, the trustee manages the trust and has a fiduciary duty to beneficiaries. Ultimately, beneficiaries receive assets according to the trust agreement upon the grantor’s death, bypassing probate.

2 Types of Living Trusts: Revocable and Irrevocable

There are 2 different types of living trusts: revocable and irrevocable. Here is more information about each including the advantages and disadvantages.

Revocable Living Trust

A revocable living trust is the most common type of living trust. The grantor maintains control over the assets placed within the trust. In addition, at the creation of the trust, the grantor can designate themselves as the trustee and make changes at any time. Furthermore, revocable living trusts are often used to protect the assets of the grantor should they become unable to control them.

Advantages:

  1. Avoiding Probate: A revocable trust can help assets pass to beneficiaries without the need for probate court.
  2. Control: A living trust allows the grantor to maintain control over their assets while they are alive and after they pass away.
  3. Privacy: While a will is a public document that anyone can access, a revocable trust is a private document. Therefore, this document is not available for public viewing.
  4. Flexibility: Each individual can customize revocable trusts to suit their particular requirements, making them a flexible estate planning tool. A grantor can update and change them throughout his/her lifetime.
  5. Asset Protection: An irrevocable trust can protect assets from lawsuits and creditors, providing peace of mind for grantors and beneficiaries.
  6. Incapacity Planning: A living trust can provide for the management of the grantor’s assets in the event they become incapacitated.

Disadvantages:

  1. Cost: Creating a living trust can be more expensive than creating a will because it requires more legal work and ongoing maintenance.
  2. Complexity: Setting up and maintaining a living trust can be more complex than creating a will. It may require transferring assets into the trust and re-titling them, which can be time-consuming.
  3. Control: Once assets are transferred to a living trust, the grantor loses some control over them. The trustee becomes the legal owner of the assets, and the grantor may not be able to sell or manage them without the trustee’s permission.
  4. Privacy: While a living trust can help avoid probate court, it is not a private document. Anyone who has an interest in the trust can request to see it.
  5. Limited Protection: While an irrevocable trust can protect assets from creditors and lawsuits, a revocable trust offers limited protection. Creditors and lawsuits can still go after assets held in a revocable trust.

Irrevocable Living Trust

An irrevocable living trust transfers control and ownership of assets to the trustee and named beneficiaries. The trust can only be modified in specific situations, and it protects assets from creditors and reduces taxes.

Advantages:

  1. Asset Protection: An irrevocable trust can protect assets from lawsuits and creditors.
  2. Tax Benefits: An irrevocable trust can help reduce the taxable estate.
  3. Medicaid Planning: By transferring assets out of their name, the grantor can potentially qualify for Medicaid benefits.
  4. Charitable Giving: One can use an irrevocable trust as a charitable giving tool, allowing the grantor to donate assets to charity while receiving tax benefits.
  5. Control: While the grantor may not have direct control over the assets in an irrevocable trust, they can still control the distribution and management of assets through the trust provisions.

Disadvantages:

  1. Cost: Creating a revocable trust can be more expensive than creating a will because it requires more legal work and ongoing maintenance.
  2. No Flexibility: Unlike a revocable trust, a grantor cannot modify or revoke an irrevocable trust, except in limited circumstances.
  3. Tax Consequences: Transferring assets into an irrevocable trust can have tax consequences, both in terms of income tax and estate tax.
  4. Loss of Access to Assets: In some cases, transferring assets into an irrevocable trust can result in the loss of access to those assets. This can be a disadvantage if the grantor needs access to the assets for living expenses or other purposes.
  5. Potential for Disputes: The transfer of assets into an irrevocable trust can sometimes lead to disputes between the grantor and their beneficiaries or other parties.

Differences Between a Will and a Living Trust

Living trusts transfer assets to a trustee and protect them while living. Additionally, it’s a private document that doesn’t go through probate court and can be changed during the grantor’s lifetime.

In contrast, a will outlines how assets should be distributed after someone dies. Moreover, it goes into effect only after death and must go through probate court. Although one can modify a will during life, it becomes a public document after death. However, a will can name guardians and specify funeral arrangements.

Assets in a Living Trust

Assets must be assigned to a living trust to be covered by its terms. That means they are re-titled to indicate ownership by the trust. These assets include real estate, financial accounts, personal property such as jewelry, artwork, antiques, and business interests.

Specific financial accounts and items can include:

  • Checking and saving accounts, and cash
  • Life insurance policies
  • Stock and bond certificates
  • Safe deposit boxes
  • Mutual fund accounts, brokerage accounts
  • Money market accounts, certificates of deposit
  • Money owed to you
  • Non-qualified annuities

A 401(k) or IRA shouldn’t be put in a living trust. The IRS views it as an early withdrawal, causing taxes and penalties.

In Summary

A living trust is a legal arrangement that allows an individual to protect their assets and direct their distribution after death. By avoiding probate court, a living trust can save time, money, and hassle for family members and beneficiaries. There are two main types of living trusts, revocable and irrevocable, each with its own unique benefits and drawbacks. If you’re considering creating a living trust, it’s important to work with an experienced estate planning attorney to ensure that your trust meets all of your needs.

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