A living trust is a legal document you set up while you’re alive to ensure that the assets you put in the trust, such as real estate, stock and bond holdings, CDs, and jewelry, are distributed in the way you want after your death without your beneficiaries having to go through court probate to receive the assets you pass on to them. It can be an essential part of estate planning.
A key benefit of a living trust, also known as a revocable trust, is that you retain control of your assets and property in the trust during your lifetime. You can make changes to the trust, such as including a newborn as a beneficiary, adding or removing assets, or making changes as to who gets what.
This type of estate planning tool, though, also allows you to name a third party, known as a trustee, to manage and make decisions about assets in the trust on your behalf when you die or if you’re unable to do so due to illness or injury. The trustee, who acts as a fiduciary, distributes the proceeds of the trust to your beneficiaries based on your wishes.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
“A living trust is really a shell in which you place your assets so that when you become incapacitated or pass away, your wishes are respected,” said Harry Drozdowski, senior wealth planning strategist at Wells Fargo.
What are the benefits of a living trust?
Avoiding Probate. Assets held in a living trust can be distributed to beneficiaries without the need to go through the court system, a dreaded process known as probate. This legal procedure, in which the court validates a deceased person’s will, is time-consuming, as probate typically takes months and can last years. Probate also comes with costly attorney and court fees. Avoiding probate by drawing up a living trust ensures that your assets are passed to beneficiaries more easily, quickly and privately.
Preserving Privacy. Another perk of a living trust is that avoiding probate means your financial affairs will remain private and out of public view. In contrast, a will, which must pass through probate, becomes part of the public record, which means your nosy neighbor can find out how the estate was divided up and who got what.
Preparing for Incapacity. With folks living longer, it’s increasingly important to prepare ahead for any unexpected physical or mental issue, such as brain trauma or dementia, that makes you unable to manage your own affairs. Having a living trust in place ensures that your trustee will distribute your assets as you specified in the trust and in the best interests of your beneficiaries.
“Living trusts are a very efficient way to leave money to your family or people you care about because it protects those assets,” said certified financial planner Brad Bernstein, a senior vice president and senior portfolio manager at UBS Wealth Management. “It puts a layer of protection around your assets for when you’re no longer here, and it avoids probate and keeps your business confidential.”
How do you set up a living trust?
To get the ball rolling, meet with an attorney specializing in estate planning. To create a living trust, you’ll need to choose a trustee, typically a person or professional you trust that you want to settle your affairs. Next, create a list of assets that you want to transfer to the trust and leave to loved ones, charities or other beneficiaries. Specify who the beneficiaries are and what assets you’re leaving them. Finally, and this is important, fund the trust by transferring the title of assets to the living trust.
Keep in mind that some assets are better to inherit than others. Read up on both the best assets to inherit, as well as the worst assets to leave your heirs.
“If something’s not in there (the trust),” said Drozdowski, “the trustee will be unable to manage those assets.” Let’s say, for example, you have a disabled child, and you want the trustee to manage the money you leave behind for their care after you pass away. If the investment account isn’t listed and funded in the trust, the trustee is unable to make legally binding financial decisions for your child.
Oftentimes, the person creating the living trust goes through the entire process but fails to fund the trust. The downside? When they die, the assets that were supposed to be protected by the living will instead fall under the provisions of the will.
“You lose all the benefits of the living trust (if you don’t fund the trust),” said Bernstein.
What are the downsides of a living trust?
Despite the many estate planning benefits of a living trust, these legal documents do come with limitations. A living trust, for example, won’t help you reduce your estate taxes, says Drozdowski. Nor will it enable you to sidestep all legal fees, as there are costs involved in drawing up the document.
And, if you do create a living trust and dot all the I’s and cross all the T’s properly, make sure you alert someone as to the purpose of the document and where it is housed. “Don’t put your living trust in a safe somewhere that nobody (including the person you named as the trustee) knows about,” said Drozdowski. “That becomes a bit of a snafu.”
Instead, be sure to let the people mentioned in the trust know that you’ve set one up.
“Tell the kids, ‘we’ve done a revocable trust and here’s what it means, and here’s who the trustee is going to be,’” said Drozdowski.
How is a living revocable trust different from an irrevocable trust?
A living trust will be sufficient for most people. It provides a way for you to control your assets during your life and dictate how you'd like them managed after your death.
If you have a very high net worth, an irrevocable trust may be a better choice. You will remove assets from your estate, sheltering them in the trust. This type of trust can help you avoid taxes and offers greater asset protection. For more on this decision, read Revocable vs. Irrevocable Trusts: What You May Not Know.
Related Content
-
President Trump Makes Markets Move Again: Stock Market TodayThe White House is moving ahead with plans to reshape the Federal Reserve and to buy shares in more sectors and stocks.
-
Is the ‘Pumpkin Spice Tax’ Coming for Your Fall Coffee Budget?Food Taxes Inflation pressures, tariffs, and talk of the so-called 'pumpkin spice tax' have some wondering about rising coffee prices.
-
I'm a Wealth Adviser: If You're a DIY Investor, Don't Make These Five MistakesEven though you may feel confident because of easy access to investing information, you may be making mistakes that could compromise your long-term performance. Here's what you should know.
-
I'm a Financial Pro: Why You Shouldn't Put All Your Eggs in the Company Stock BasketLimit exposure to your employer's stock, sell it periodically and maintain portfolio diversification to protect your wealth from unexpected events.
-
How Will the One Big Beautiful Bill Shape Your Legacy?The One Big Beautiful Bill Act removes uncertainty over tax brackets and estate tax. Families should take time to review estate plans to take full advantage.
-
Should You Claim Social Security Early or Late? A Financial Adviser Weighs InThere isn't a wrong age to start claiming Social Security, but there are factors that everyone should consider to avoid leaving money on the table.
-
Three Things Financially Confident People Do, From a Pro Who KnowsIf you have any worries about your retirement future, take back control with these three tips.
-
How Much Do I Need to Retire? A Financial Professional Breaks Down Your OptionsWhat it all boils down to is will you be comfortable in retirement? Some people may rely on formulas, while others just aim for $1 million nest egg.
-
When You Need Capital Quickly, Think 'Ready, Set, Fund': A Financial Adviser's StrategyInvestors must be able to free up cash to meet short-term needs from time to time. This strategy will help you access capital without derailing your long-term goals.
-
I'm an Estate Planner: Moving Family Assets to a Safe Haven Abroad Could Be a Huge Headache for Your HeirsIn troubled times like these, wealthy clients may seek financial refuge outside of the U.S. But that could cause more tax and estate problems than it solves.
