The living trust, otherwise known as a revocable trust, is an estate planning tool that has grown in popularity over recent years. Nearly 20% of Americans incorporate a living trust into their estate plans. The growth in popularity is largely due to the unique advantages it can provide both to the individual and his/her family. The following content addresses those interested in learning about a living trust and those on the fence about pursuing one.
What is a Living Trust?
Simply put, a living trust is a unique asset container, holding the assets of a trust owner (grantor) during his or her lifetime. While living, the grantor benefits from the living trust. The trust owner designates a “successor trustee,” and, upon death, the named trustee administers all contained assets and assigns assets to designated beneficiaries. The grantor may include conditions in the trust that beneficiaries must meet (i.e. age) before receiving assigned assets. Assets do not have to pass outright to the beneficiaries when the grantor dies. They can be maintained in trust and controlled by a trustee if the grantor wishes. Essentially the grantor can control their assets beyond death instead of assets passing outright to beneficiaries.
Living trust owners can place any item of value into the trust, from an investment account to real estate to motor vehicles to intellectual property. When a living trust in created, the owner’s assets are transferred from individual ownership to trust ownership. The trust, essentially, owns any contained assets. For example, if a trust owner transfers a vehicle to the living trust, the individual removes their name from the title in exchange for the name of the trust.
Why Is a Living Trust Called Revocable?
A living trust is not concrete. In fact, the living trust may be changed, edited, or completely canceled during the owner’s lifetime. While the process of changing or canceling a living trust is not simple, it is certainly possible. Therefore, living trusts are often called “revocable trusts.”
What are the Benefits of a Living Trust?
Probate is avoided
Probate is the legal process by which a deceased person’s estate is distributed. Probate can be time-consuming and costly. Depending on the size and complexity of the person’s estate and designated beneficiaries, court-supervised probate may delay and even diminish distributed inheritances. Assets held in a living trust avoid probate. As mentioned, the designated successor trustee is chosen to accept and distribute assets. This process can take place without court supervision or involvement. Distributing assets held in a trust can be significantly faster and less costly than the legal process that would be involved in a probate distribution of assets as further court/legal expenses can be avoided.
A living trust is often cost-effective
As mentioned, avoiding probate expenses can be a significant money saver. That being said, there are upfront financial costs and time involved in setting up a living trust. A living trust requires the owner to “fund the trust,” transfer ownership of assets to the trust, and an attorney is usually required to guide the process. If the grantor wants to name the trust as beneficiary on a 401(k) plan, IRA, or life insurance policy, further paperwork must be accurately completed. The initial costs associated with creating a living trust are often greater than a traditional last will and testament; however, the cost saving when the grantor dies can be significant if probate is avoided.
Privacy is guarded
When the legal document does not pass through court-supervised processes, including probate, privacy is guarded. The living trust is known among the designated private party(s) involved and will never become a part of public record. The trust owner, successor trustee, and designated heirs are the only individuals involved. A living trust is a completely private document during and after the owner’s lifetime.
Incapacitation does not require court conservatorship
In the event that the grantor of the living trust becomes extremely sick or incapacitated, court-appointed conservatorship will be prevented. The appointed successor trustee will manage the incapacitated owner’s financial affairs until he or she is well enough to retain control. Ultimately, the living trust protects the owner.
Peace of mind is achieved
A living trust provides the unique opportunity for the trust owner to create a clear-cut, asset distribution plan before death. Inheritances can be carefully thought through, unintentional disinheritance is prevented, and assets can be distributed over time to protect a friend or family member with unique requirements. The living trust owner’s entire estate will be meticulously distributed after death pursuant to the grantor’s intentions.
What is the Difference Between a Trust and a Will?
As mentioned, the privacy of a living trust remains guarded, even after the owner is deceased. On the other hand, wills become public record, searchable by the general public.
The living trust affects the owner during his or her lifetime. The living trust involves the owner’s property from the moment the trust is acquired and funded. A will, however, does not take effect until after the owner’s death.
A living trust does not go through a court-supervised probate process – often taking an exorbitant amount of time and, occasionally, money. A traditional will must go through the probate process before assets are distributed to designated heirs.
Living Trust and “Pour-Over Will”
Many individuals with a living trust also establish a “pour-over will.” Although the will goes through probate after death, it serves as a bottom line, catching any forgotten assets. The goal of a pour-over will is to protect any inadvertently remaining property from having to go through probate.
At DHJJ, we work with every client as an individual – not another set of numbers. We guide clients to long-term financial security with a comprehensive approach. Our professional team offers estate planning as part of our financial planning services.
A detailed, personalized estate plan that ensures your wishes are met and taxes are minimized often requires the expertise of a financial advisor. The advisors at DHJJ are well trained in assessing your overall financial picture while identifying the optimal treatment for each component.
To learn more about how we can serve you, contact our Naperville team at 620.420.1360 or our St. Charles team at 630.377.1106 – or complete our online contact form! We look forward to getting in touch.