how living trusts work
living trusts are significant in that they allow a trustee to manage the assets in the trust and transfer them to beneficiaries after the grantor s death they begin with the establishment of a trust instrument during the lifetime of the grantor this is a legal document that lays out the rules and provisions of the trust due to their importance and potential complexity those arranging for a living trust often work with experienced estate planning professionals to ensure a proper setup once the living trust is created the grantor decides what assets should be in it and then transfers the title of those assets to the trust living trusts are managed by a trustee who typically has a fiduciary duty to manage the trust prudently and in the best interests of the trust s beneficiaries beneficiaries are designated by the grantor when they create the living trust upon the death of the grantor these assets flow to the beneficiaries according to the grantor s wishes as outlined in the trust agreement a living trust itself can be named the beneficiary of certain assets that would otherwise flow directly to the named beneficiary regardless of what is stated in a will unlike a will a living trust takes effect while the grantor is living the trust does not have to go through probate for assets to reach the intended beneficiaries when the grantor dies or becomes incapacitated 1assets 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 the types of assets that can be assigned to or fund a trust include real estate land commercial property homes financial accounts personal property such as jewelry artwork antiques and business interests specific financial accounts and items can include you shouldn t put a 401 k or ira in a living trust that s because if you change the title or ownership structure of e g your employer sponsored retirement plan the irs will see it as an early withdrawal that means you d owe taxes on the amount in your account in the year that the assignment takes place if you re less than 59 1 2 you ll also have to pay a 10 penalty for the early withdrawal types of living truststhe two primary types of living trusts are revocable and irrevocable a revocable living trust is the most common type of living trust it is a trust whereby the person who creates it the grantor maintains control over the assets placed within the trust at the creation of the trust the grantor can designate themself as the trustee they have the power to change and amend trust rules at any time they re free to change beneficiaries change trustees remove assets or terminate the trust revocable living trusts are often used to protect the assets of the grantor should they become ill or otherwise unable to control them in this situation the successor trustee will make decisions for the grantor revocable living trusts often become irrevocable upon the creator s death 1taxes owed on assets in a living revocable trust are still paid by the grantor while living however tax rates don t increase just because assets are placed within the trust 3with an irrevocable living trust the trust itself owns the assets and the grantor can t designate themself as the trustee thus the grantor relinquishes certain rights of control over the trust the trustee effectively becomes the legal owner 4once an irrevocable living trust is created the named beneficiaries are set and the grantor can do little to amend that agreement in fact trust provisions can only be changed in certain specific situations such changes may even require the approval of the courts in addition you can never take back the assets assigned to an irrevocable living trust 5there are benefits to having an irrevocable living trust for one it protects the assets within it from lawsuits and creditors that makes them particularly useful to professionals who may be vulnerable to litigation such as doctors or attorneys also the grantor can reduce their taxable estate because the trust and not they owns the assets in addition the assets aren t taken into account where eligibility and costs for government programs such as medicare and medicaid are concerned 6individuals may find it useful to have both a living trust and a will because for the most part they perform different functions moreover a living trust goes into effect as soon as it s created and serves to protect the assets it holds while a person is living a will goes into effect when a person passes away advantages and disadvantages of a living trusta living trust is a powerful estate planning tool that allows you to maintain control over your assets while living and make the disposition of your estate an easier matter for your family after your death as with most things while it has its advantages it has some disadvantages as well living trust vs willa living trust allows you to name beneficiaries and appoint a trustee to manage and distribute trust assets after your death in turn it allows your family to avoid the intrusion of probate for property distributed by the trust and other matters related to your estate some individuals establish living trusts simply to avoid probate however they can be more complicated and costly to create than a will also they require a notary public a living trust cannot designate an executor for a will or name guardians for minor children therefore individuals with living trusts usually draw up a will too a living trust takes effect immediately once created and signed and results in you being able to manage control and protect your assets throughout your lifetime it also means that this control via your instructions in the living trust document will extend beyond your death to the distribution of the assets to your beneficiaries 1a will is a legal document that names an executor to carry out your wishes after you re gone it directs how your assets should be distributed by the executor it also designates guardians for minor children and includes instructions for other things such as the payment of debts and taxes debt forgiveness and funeral arrangements the handling of a will including the distribution of assets involves the court supervised process of probate probate is known to take a great deal of time and potentially to be expensive what s more matters relating to a will become public once a probate court is involved a will is not a complicated document to create and thus is less costly than a living trust it requires a witness to your signature but no notary public it takes effect upon death or incapacitation 7