A living trust is created while the “grantor” or “settlor” is still living, typically to protect the assets and ensure their estate is distributed according to their wishes upon death.
A living trust is a legal arrangement. When creating a living trust, the individual (the grantor or settlor) sets guidelines for the terms of the trust and assigns and transfers assets to the trust. The trust is also used to appoint a trustee to manage the beneficiary’s inheritance, including how and when the distribution of assets occurs.
Below, we will look at how a living trust works, the types of living trusts, and the pros and cons of a living trust.
How A Living Trust Works
When a living trust is created, it transfers management of the assets to a trustee, who then has a fiduciary duty to manage the trust in a way that suits the best interests of the trust beneficiaries. A living trust takes effect while the grantor is alive. Usually, the assets are not distributed until death.
There are two primary types of living trusts: irrevocable and revocable.
Revocable Living Trust
The most common type is called a revocable trust. When someone establishes a revocable trust, they maintain control over any assets they place within it. The grantor may also designate himself as the trustee and retain the power to change or amend the trust rules at any time. The grantor can also change the trustee, terminate the trust, remove assets, and change beneficiaries.
People often use a revocable trust to help protect the assets of individuals should they become sick or unable to control them for any reason. Should this occur, the designated successor trustee will be the one to make any decisions for the grantor. Once the grantor has died, the revocable trust will become irrevocable.
When someone sets up a living revocable trust, they are still responsible for paying any taxes on assets.
Advantages of A Revocable Living Trust
- Avoiding probate. One of the most common reasons individuals create a living trust is to avoid probate. Probate can be very time-consuming and expensive, depending upon the complexity of the estate. When you set up a trust, all the assets avoid going through probate upon the estate owner’s death.
- Protecting the grantor’s privacy. All wills that go through probate become a matter of public record. By avoiding probate, the will and assets in the trust will be handled discreetly and shielded from public view, keeping their assets, wishes, and beneficiaries private.
- Protecting the beneficiary. Beneficiaries who are minor children, someone who is incapacitated, or those with special needs are protected and kept secure and private by establishing a living trust. A trust can also be used to protect your assets from family members or loved ones who are untrustworthy to manage assets responsibly. A revocable living trust can also ensure that these beneficiaries may benefit from the assets without giving them control.
- Managing assets. Assets are more manageable as the grantor can combine assets into the trust, creating productive and efficient management. A revocable living trust can also increase the value of the trust property and delegate management to the trustee to maintain your real estate portfolio while retaining ultimate control.
Disadvantages of a Revocable Living Trust
- Cost and Transfer of Title. Additional fees are required when setting up living trusts due to the transfer of title process, which requires other paperwork. All assets that need a title transfer must be done individually and include things such as real estate or changes in ownership. If multiple assets require title changes, additional filing fees will be required to register the charges. The prices you pay to transfer the title are in addition to the cost of creating the trust. Consulting an estate attorney who can help determine which type of trust is best for your circumstances is crucial.
- Lacks tax advantages. When you place assets in a revocable living trust and essentially transfer ownership, you will still be personally taxed on any income generated from these assets.
Irrevocable Living Trust
When an individual sets up an irrevocable living trust and places assets in the trust, the trust becomes the legal owner of assets.
When a grantor creates an irrevocable trust and names the beneficiaries, the irrevocable living trust cannot be changed except for specific circumstances. Any changes that are made may also require the court’s approval.
Benefits of an Irrevocable Living Trust
- Asset protection. Even though assets are protected, it is essential to note that the grantor relinquishes all partnership and control over assets in the trust. All assets in the trust are protected from creditors and may be segregated from marital property, keeping them separate in the event of a divorce.
- Reducing taxes. It may reduce your estate taxes by transferring assets into an irrevocable trust; however, currently, most people do not benefit as the tax exemption rate is $12.92 million. Be sure to check the state regulations, as some states will tax your estate at the time of your death.
Assets in a Living Trust
Various types of assets may be assigned to a living interest, including the following:
- Personal property such as artwork, jewelry, and antiques
- Real estate, including commercial properties, residential and rental properties
- Business interests
- Financial accounts, including mutual fund accounts, safe-deposit boxes, stock and bond certificates, money market accounts, certificates of deposit, cash, checking and savings accounts, life insurance policies, money owed to you, and nonqualified annuity is are all examples of assets that may be assigned to a living trust
If you have an IRA or 401(k), you should avoid placing it in a trust as the IRS will label it as an early withdrawal, meaning you would owe taxes and be required to pay a 10% penalty fee for early withdrawal.
Hiring an experienced estate attorney to help you choose the type of trust that best suits your needs and your estate to ensure that your estate and wishes are appropriately managed is crucial.
For All Of Your Estate Planning Needs In Baldwin County, Brackin Law Firm Is Here For You
At Brackin Law Firm, we are here to help you with all your estate planning needs, whether you are an individual or family with a single home or a complex estate. We have helped Baldwin County families for over 35 years under services, including estate planning and trust concerns, criminal and DUI defense matters, divorce, child custody in family law, and more.
Contact us today for a consultation and legal representation, and we will help you with your legal representation needs.