When it comes to estate planning, more people are establishing a living trust in addition to creating their last will and testament. But what exactly is a living trust and what are the main benefits? The following is a basic living trust definition that can help you better understand how a living trust works and how it may fit in your estate plan.
Living trust definition
A living trust is a legal document created by you (the grantor) while you are alive. Just like a will, a living trust spells out your wishes regarding your assets, dependents, and your heirs. The primary difference between a will and a living trust is that a will becomes effective only after you die and after it enters into probate.
A living trust can bypass the expensive and lengthy probate process, allowing your trustee or successor trustee to carry out your instructions as documented in your living trust at the time of your death. Moreover, if at any time you become incapacitated and are unable to manage your affairs, your successor trustee can step in and manage them on your behalf.
Types of living trusts
There are two types of living trusts - revocable and irrevocable.
With a revocable living trust, you are typically named the trustee and retain full control over the assets in your trust. It's called revocable, because at any time you can change or revoke the trust. Your assets in the trust avoid probate by passing directly to your beneficiaries when you die.
An irrevocable living trust gives you the right to permanently and irrevocably assign your assets while you are living, relinquishing all control. Because you no longer own these assets, they are no longer considered part of your estate and generally won't be subject to estate taxes.
Some common reasons for setting up a living trust may include:
- Providing for minor children or family members who are inexperienced or unable to handle financial matters
- Providing for management of personal assets in the event you are unable to handle them on your own
- A way to avoid probate costs and delays, resulting in a more timely transfer of your assets to your beneficiaries
- A possible reduction in estate taxes
- You wish to keep the details about your estate private (unlike a will that is public)
What not to do when writing a living trust
Once your trust is created, you can name the trust itself as your beneficiary on your life insurance policies. However, if you opt to create a living trust yourself instead of relying on an estate planning attorney to do so, there are several common missteps that you should make an effort to avoid.
- Don’t forget to include the names of the grantors, trustees, and beneficiaries.
- Don’t forget to “fund” the trust. If the living trust is never funded, there are no actual assets to pass on to your beneficiaries.
- Don’t use “precatory” language that expresses wishes or desires, but does not create legal obligation. Legal documents require concise language and specific terms in order to fully enforce your final wishes
- Don’t neglect to hire a notary public. You may be able to skip on the expense of hiring an estate planning lawyer to help you draw up this document, but you shouldn’t opt out of hiring a notary public to notarize your document, even though it might not be required by your state.
While both wills and living trusts are ways that you can provide for the distribution of your assets upon your death, they both work differently and offer their own benefits. The decision whether to create a will and/or a living trust depends on your individual circumstances. Before making any decisions, consult with a qualified estate planning attorney.