Creating an estate plan is crucial for everyone over the age of 18, yet few Americans are making it a priority. A recent survey by elder care site Caring.com found 64% of Americans believe having a will is important, yet only 32% of Americans have an estate plan.
It’s an overwhelming and confusing process that can be hard to tackle — especially if you don’t know all the options available to you. Some of these options — such as a living trust — even allow you to control the preservation of your assets while you’re still alive.
What is a living trust?
A living trust is a legal agreement that allows you, the grantor, to control how your assets are managed and distributed during your lifetime and after your death. This legal document includes a designated trustee, who is responsible for managing assets in the trust according to what’s best for its beneficiaries. Living trusts also provide specific directions for how assets should be distributed once the grantor dies.
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Arguably one of the biggest appeals of a living trust is that, unlike a will, this legal agreement takes effect while the grantor is living, which can help prevent the trust from going through probate before assets can be distributed to listed beneficiaries.
What assets can be assigned to a living trust?
To be covered by the terms of the agreement, assets must be assigned to the living trust. This officially retitles them as property of the trust. Real estate, financial accounts — including checking and savings accounts, money market accounts and CDs — jewelry, artwork and even business interests can be assigned to a living trust. However, note that retirement accounts, such as 401(k)s or IRAs, should not be assigned to a living trust. By doing that, you’re changing the ownership or structure of the retirement plan, which translates to an early retirement withdrawal in the eyes of the IRS.
The different types of living trusts
Living trusts can be structured in one of two ways: revocable or irrevocable.
A revocable trust allows the grantor to maintain control over the assets in the trust — designating themselves as the trustee. This gives them the power to change the trust’s terms, change beneficiaries, designate a new trustee, remove assets or terminate the agreement. This type of trust is especially useful if the grantor becomes unable to manage the assets. When this happens, the successor trustee will make decisions on behalf of the grantor. These trusts generally become irrevocable once the grantor dies.
An irrevocable trust is a legal agreement in which the trust becomes the legal owner of the assets. The key difference here is that the grantor cannot designate themselves as trustee, forfeiting certain rights of control over the trust. Once an irrevocable trust is created, the named beneficiaries are set and it can be very difficult to change. In fact, some changes may need to be approved in court.
Giving up control does come with some benefits, though. An irrevocable trust prevents its assets from being vulnerable to lawsuits and creditors. The grantor can also minimize their taxable estate, because the assets legally belong to the trust.
Are living trusts worth it?
As with anything in life, there are pros and cons to establishing a living trust. With a living trust, assets can be transferred to beneficiaries smoothly, quickly and without interference from the court. As a grantor, you can also take comfort in knowing that under a revocable living trust, your assets must be protected by your successor trustee. Living trusts can also help reduce your taxable estate and protect you from litigation.
There are downsides to establishing a living trust. For example, with an irrevocable trust, the grantor gives up ownership and control over the assets assigned to it. For certain assets, such as real estate, to be transferred, the title change must go through the courts, which can bring filing fees to register title changes. And unfortunately, unless the living trust is irrevocable and reduces the size of the taxable estate, there are no tax advantages. Income generated by assets, or on any property, will be taxed.
While this information provides an overview of living trusts, it’s best to consult with an estate attorney if you’re thinking about establishing one. An estate attorney can help you decide what assets should be assigned to the trust and whether a revocable or irrevocable living trust should be established. They can also explain the legalities of the trust, ensuring you fully understand its terms and conditions.
Pat Simasko is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Simasko Law is a separate entity and not affiliated with CoreCap Advisors. The information provided here is not tax, investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
The content of this article is developed from sources believed to be accurate and complete; however, no guarantee can or is given for such accuracy or completeness. Nor is the information in this material intended as financial, tax or investment advice. Please consult your own qualified professional for specific information regarding your individual situation.
The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale, or the solicitation of such an offer, of any security, insurance or annuity product.
Investing involves risk, including the loss of principal. No investment strategy can guarantee a profit or protect against loss in a period of declining values. Any references to protection benefit or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.
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