Understanding Living Trusts: Your Quick Guide To How They Work

Living trusts are an estate planning option that few individuals make use of. Fundamentally, a living trust acts in much the same manner that a will does. A revocable living trust, however, offers some options that a will does not.

In the most basic possible terms, a living trust is a legal container for property that is created by a trust agreement. The trust takes the title of various properties and assets. Control of those assets is granted to a trustee.

In the majority of cases, the trustee is the same individual that is funding the trust. This begs the most obvious question: why?

Understanding the Basics of Living Trusts

Why would someone create a legal document to give themselves control over property they already have control over?

The one major benefit of a living trust is that it names beneficiaries of your assets upon your death and can avoid the court system during distribution. The key factor that distinguishes it from a will is that it is designed to avoid probate.

The Benefits of Establishing a Living Trust

Why would you want to establish a living trust?

  • You can transfer your assets privately.
  • Asset transfers are not a matter of public record.
  • You can dictate what happens to your property if you’re incapable of managing it yourself.
  • Living trusts are easier to change than a will.
  • Living trusts are more difficult to contest than a will.

The Disadvantages of Establishing a Living Trust

Aside from the fact that living trusts cost money to set up, there are a number of things to bear in mind when establishing a living trust. Living trusts do not always avoid the problems they are designed to avoid, and there are legal complexities to the process that are not always obvious.

Transferring Assets to a Trust Means that You No Longer Own Them

It’s important to keep in mind that when a property or asset is transferred to a trust, the asset becomes property of the trust. For instance, if you were to transfer a car to a living trust, you might find it difficult to insure the car as a result, since the car is no longer in your name. This, in fact, makes it difficult to transfer certain kinds of assets into the trust.
Only when the titles of these assets are transferred to the trust do they avoid the probate process.

Living Trusts are Not Tax Havens

There are some people that are under the impression that living trusts allow assets to transfer tax-free. That isn’t the case. Assets stored in a living trust are not granted any kind of special tax consideration, either while the grantor is alive, or after the grantor has passed.

In addition, all assets in a living trust are considered “countable” for the purposes of qualifying for entitlements such a Social Security or Medicare.

Living Trusts are Not Creditor Havens

Assets that are placed in a trust are still subject to claims brought forth by creditors. In other words, living trusts don’t “shield” your assets from claims against the estate, either while you’re alive or after you’ve passed.

When Does a Living Trust Make Sense?

Not everyone will need a living trust. There are, however, instances in which having one makes a great deal of sense. Read on ...

Living Trusts can Avoid Probate Messes

Since probate is governed by state law, properties held across multiple states can be subject to any number of jurisdictional restrictions depending on where they’re held. While going through probate is not necessarily the end of the world, going through probate in multiple states can get relatively messy. In addition, there are some states that have particularly complicated probate laws. Properties held in California and Maryland are solid candidates for a living trust.

Florida is another candidate for a living trust. There are restrictions on who can serve as a personal representative for a descendant. With a living trust there, is no such complication.

Living Trusts Offer More Privacy

The one major advantage of avoiding probate is that court proceedings are a matter of public record. For those whom privacy is a major consideration, living trusts can be an ideal way to distribute your assets after you pass.

The Bottom Line

Living trusts are a legal vehicle that individuals use to pass their assets. They function like a will but have the advantage of avoiding probate when they’re drafted properly and when all assets have been transferred properly. For most people, a well drafted will is about all they’ll need.

For those with a lot of assets or assets spread across multiple states, a revocable living trust is a powerful legal tool that can streamline the process of distributing assets after death. Trusts have the advantage of being more difficult to contest. They are also easier to amend than wills. Update your living trust when it's needed and you can rest easy, knowing you're handling an important aspect of your asset protection strategy.

Last Updated: 
March 10, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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