Living Trust
Basic Benefits
More and more individuals are putting their assets into revocable living trusts, which are completely flexible and broadly adaptable arrangements for the management, protection, and distribution of a family’s assets.
A living trust is created during your lifetime and is funded with most or all of your assets by simply re-titling the assets to yourself as a trustee.
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- A living trust is living in that it takes effect immediately. You continue to enjoy all the present benefits of your assets without changing your ability to control them.
- A living trust is revocable during your lifetime, meaning its terms are changeable, and assets can be re-transferred to your name if desired without adverse tax consequences.
- A living trust is a private agreement where the distribution of assets under the terms of the trust is not subject to the publicity given to wills in probate proceedings.
The complete flexibility of a revocable living trust means that one can be drafted to suit your individual needs and family situation.
When you create a living trust, you can act as your trustee, so there are no management fees or loss of control. You can change or modify the trust terms at any time, change beneficiaries, and add or delete assets held by the trust without tax consequences.
- A revocable living trust does not complicate the management of your assets. While protecting your property within a living trust, you can do whatever you can now with your assets and property. You can buy, sell, borrow, make gifts, etc.
- With a living trust, you retain control over all your property and assets during your lifetime, and you determine the distribution of your estate after your death. Since a living trust is revocable, it has no income tax consequences during your lifetime; no separate tax return is even filed, and all trust income is reported under your social security number on your 1040 form.
With a Living Trust, you are also appointing someone else (a professional, a trusted friend, or a family member) to manage the assets in your trust for your benefit in the event of your incapacity (e.g., Alzheimer’s, a stroke, an accident, etc.); because the assets are in a trust, no court-administered conservatorship will be required.
Under a living trust, you have the successor trustee of your choice ready to step in and take over your affairs until you recover or for the remainder of your lifetime.
What Is Probate, and Why Does Everyone Want to Avoid It?
When a loved one passes away, his or her estate often goes through a court-managed process called probate or estate administration, where the deceased’s assets are managed and distributed. If your loved one owned his or her assets through a well-drafted and properly funded living trust, no court-managed administration is likely necessary. However, the successor trustee needs to administer the distribution to the deceased.
The length of time needed to complete the probate of an estate depends on the size and complexity of the estate and the local rules and schedule of the probate court.
Every probate estate is unique. Still, Most Involve the Following Steps:
- Filing of a petition with the proper probate court.
- Notice to heirs under the will or to statutory heirs (if no will exists).
- Petition to appoint Executor (in the case of a Will) or Administrator for the estate.
- Inventory and appraisal of estate assets by Executor/Administrator.
- Payment of estate debt to rightful creditors.
- Sale of estate assets.
- Payment of estate taxes, if applicable.
- Final distribution of assets to heirs.
What Is a Living Trust?
A living trust can hold legal title to your assets and provide a mechanism to manage them. You (and your spouse) are the trustee(s) and beneficiaries of your trust during your lifetime. You also designate successor trustees to carry out your instructions as you have provided in case of death or incapacity.
Unlike a will, a trust usually becomes effective immediately after incapacity or death. Your living trust is “revocable,” which allows you to make changes and even terminate it. One of the great benefits of a properly funded living trust is that it will avoid probate and minimize the expenses and delays associated with the settlement of your estate.
What Are the Advantages of Having a Living Trust?
Like a will, a living trust is a legal document that provides for the management and distribution of your assets after you pass away. However, a living trust has certain advantages when compared to a will.
A living trust allows for the immediate transfer of assets after death without court interference. It also allows for managing your affairs in case of incapacity without needing a guardianship or conservatorship process. With a properly funded living trust, there is no need to undergo a potentially expensive and time-consuming public probate process.
In short, a well-thought-out estate plan using a living trust can provide your loved ones with the ability to administer your estate privately, with more flexibility, and in an efficient and low-cost manner.
Will I Lose Any Control over My Property If I Create a Living Trust?
Creating a revocable living trust and transferring your assets to the name of that trust will not affect your ability to control such assets. During your lifetime, when you are mentally competent, you have complete control over all your assets. You may engage in any transaction as the trustee of your trust that you could before you had a living trust.
There are no changes in your income taxes. If you filed a 1040 before you had a trust, you will continue to file a 1040 when you have a living trust. There are no new Tax Identification Numbers to obtain. Because a living trust is revocable, it can be modified at any time or completely revoked if you so desire.
Upon your incapacity, your durable power of attorney comes into effect. It allows your loved ones to transact on your behalf according to the instructions you have laid out in the living trust.
Upon your passing, the Living Trust can no longer be modified, and the successor trustee(s) you have designated will then proceed to implement your wishes as directed, such as the transfer of your assets to your beneficiaries.
Do I Have to Transfer All My Assets to My Living Trust?
Assets with beneficiary designations, such as a life insurance policy or annuity payable directly to a named beneficiary, need not be transferred to your living trust. Furthermore, money from IRAs, Keoghs, 401(k) accounts, and most other retirement accounts transfers automatically, outside probate, to the persons named as beneficiaries.
Bank accounts that are set up as payable-on-death accounts (POD for short) or an “in trust for” account (a “Totten Trust”) with a named beneficiary also pass to that beneficiary without having to be titled into your trust. However, when you do your estate planning, it is important to seek the counsel of an experienced attorney familiar with the intricate regulations of retirement accounts who can coordinate the appropriate beneficiary designations with your overall estate plan.
If I Transfer the Title to Real Property to My Living Trust, Can the Bank Accelerate My Mortgage?
Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your living trust, as long as you live in that home. The only exception to the federal law, enacted as part of the 1982 Garn-St. Germain Act, only protects residential real estate with up to five dwelling units.
However, most clients who own residential property with more than five dwelling units tend to own them through a business entity rather than directly in their names. Hence, they are not concerned with the five-dwelling exception.
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