What Is A Living Trust?

A living trust is a revocable agreement that can be used as a tool to have your assets held by someone else, namely, the trust. Putting some or all of your assets in a living trust makes them easier to distribute at your death. A living trust also acts as an asset protection device to keep your assets safe.

You (and your spouse, if married) can be the trustee during your lifetime. Since all trust assets are held in the name of the trustee, this means you can continue to fully control all of your assets as long as you live.

In addition, you can choose who will become the successor trustee(s) after your death, whether individuals, corporate trustees (such as a bank), or both. Thus, you can indirectly control your assets after you die, both by your choice of successor trustee, and also by how you decide to have the trust administered.

Can I Avoid Probate?

Probate is the legal process of changing title to your assets and paying any debts you owe after your death. The process is administered by a judge of your state’s the probate court.

Many people want to avoid probate because it can take months or years to complete, tends to be costly, and is a matter of public record. In contrast, a living trust can distribute your assets more quickly, cheaply, and is completely private. In short, it helps cut through probate “red tape.”

A living trust avoids probate by transferring your assets now, during your lifetime, to the trustee. At your death, the assets already belong to the trust, so they are not included in your probate estate.

The key to successful avoidance of probate is to “fund” the trust by transferring your assets to the trustee while you are alive. This can be done by drawing up property deeds and schedules of assets, etc., and should be done when you first create the trust. However, assets can be added to, or removed from, the trust at any time during your life.

The Tax Consequences

There are no tax consequences when you transfer your assets into the living trust. The transfer does not trigger a capital gains tax or a new cost basis. However, a bare living trust will not, by itself, shelter your assets from estate taxes at death.

For a married couple, however, a living trust can shelter part of the total estate from estate taxes after the first spouse dies. This is done by making the decedent’s part of the estate irrevocable after death and separating it from the surviving spouse’s share. By limiting the survivor’s right to withdraw assets from the decedent’s share, that part of the estate will not be taxed when the survivor dies, keeping the government’s hands off your estate.

However, the survivor can receive all the income from the decedent’s share and even withdraw some of those assets. And of course, the survivor retains full rights over his or her share of the trust. This is an effective way to eliminate all federal estate taxes for estates up to 1.2 million dollars in 2009.

A Flexible Planning Tool

A living trust is a very flexible planning tool. For example, you can provide for someone else to take over as trustee in the event of your disability or incapacity, yet avoid a public judicial hearing or conservatorship proceeding.

You can provide for beneficiaries with special needs, or delay the inheritance of your estate until the beneficiaries reach a certain age, or have your estate distributed in installments.

Because a living trust is revocable, you may change or revoke the trust at any time during your life. You can do this yourself, without formal witnesses, a notary public, or even a lawyer, although you should seek legal counsel for anything other than a minor change.

A living trust also avoids many of the risks of liability associated with joint ownership. Assets you hold jointly with someone else are subject to the debts and liabilities of your joint owner, but assets in trust can be protected from any claims of the creditors of your heirs.

Do I Need A Will?

Yes. A living trust is only part of a complete estate plan. There are valid reasons for keeping some of your assets outside of the trust. But when you die, these assets will need to be handled. A “pour-over” will, for example, will take any assets kept outside of the trust during your lifetime and put them in your trust at death.

Also, probate administration can help to terminate creditor claims against your estate. Assets which avoid probate will not be able to extinguish creditor claims in this way.

Is A Living Trust For Me?

If you want to avoid probate, you need to think about having a living trust. A will is always subject to probate. The way to avoid probate is to place some or all of your assets in trust so they are not subject to probate.

If you are concerned about the costs or delays of probate, personal incapacity, estate taxes, heirs with special needs, financial management, or the risks of joint ownership, a living trust may be for you.

To be sure, a living trust is more complex than a simple will, but the potential future savings for yourself and your family are tremendous. A living trust could well be the key to your family’s financial security.