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?
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.
Why would you want to establish 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.
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.
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.
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.
Not everyone will need a living trust. There are, however, instances in which having one makes a great deal of sense. Read on ...
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.
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.
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.
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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