What is a Living Trust? Do You Need One or Not?
A living trust is highly desirable, but it is not the right option for everyone. This article answers a few basic questions about living trust, the probate process, and asset management.
So, what is a living trust?
As the name suggests, a living trust allows you to fund your assets into a trust. The trust holds these assets, and you become the trustee. You can manage and modify this trust until your death. The key advantage of a living trust is that you can avoid probate and your family can resolve the financial matters privately. Having said that, a living trust can help you accomplish much more if you know the way.
Historically speaking, it is thought that a living trust is only reserved for rich people. It is not true.
Who Needs a Living Trust?
- Single persons who have wanted to protect their property and funds from going into the wrong hands.
- If you own property in more than one state. You must form a revocable trust. Otherwise, your family will have to attend the probate process in two states. Not to mention, the probate process takes at least 12 months, and sometimes, it can consume several years. In Bay area, the cost of a probate is between 4% and 7% of the estate value.
- Young parents who want to protect their children. A living trust allows you to decide how minor children will get their share of the inheritance. You can also specify the age when they will get their funds.
A living trust also protects your estate in the case you become incapacitated. In that case, the law has terms to decide the ownership of the trust. It is important to note that it is easier to create a will. You do not have to fund a will, but you must transfer your estate into the revocable trust. The trust is not formed unless it has been funded by the trustee (You).
Revocable Trust Vs. Irrevocable Trust
We have been talking a lot about revocable trusts in this article. What is it?
You can alter or even cancel a revocable trust in your life. You are the grantor and the rightful owner of that trust. The funds remain yours unless you die. In that case, the estate is divided among your loved ones.
You also get the choice to form an irrevocable trust.
Unlike a revocable trust, you cannot modify or change the estate residing inside the irrevocable trust. You can edit the terms of the trust with cooperation of the beneficiary and the trustee. To form an irrevocable living trust, you (the grantor) will gift your assets to a beneficiary. The funds remain in the living trust until your death. The trustee will then hand over the funds to your beneficiary.
There are various reasons for taking this action, but the major one is “tax relief.” When you transfer funds in that way, you no longer remain the owner. So by gifting the estate, you are also not responsible for making tax payments.
When Do You Not Need a Living Trust?
There is a list of cases when you do not need to form a revocable trust:
- You and your spouse jointly own a property with the right of survivorship.
- A beneficiary for life insurance and retirement accounts have been named.
- You have added a pay-on-death designation to your bank account.
