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If you're making decisions about estate planning, you may wonder what a living trust is and how one differs from a will. Here's a look at how living trusts work and some considerations when deciding if one is right for you.
What's the Difference Between a Will & a Living Trust?
A will is a legal document that spells out how a person wants their assets, such as investments and real estate, distributed after their death. It can also designate how certain affairs should be handled, such as guardians for children or funeral wishes. The executor of the will is responsible for ensuring that the instructions are followed.
In order to understand how living trusts work, it may be helpful to know how trusts work in general. A trust is an arrangement where a trustee holds assets on behalf of a beneficiary (or beneficiaries) and specifies how and when such assets pass to the beneficiary (or beneficiaries). The person who creates a trust is known as a trustor, trust-maker, settlor or a grantor. In the case of an irrevocable trust, the trustor may be called a benefactor. With a trust, you give authority to someone, known as a trustee, to make decisions for your beneficiaries.
A living trust is a trust that's set up while you're still alive. You can serve as your own trustee, and you may be able to name a successor trustee to handle arrangements upon your death. With some living trusts, you can name someone to be your co-trustee and act on your behalf should you become incapacitated.
What's the Difference Between a Revocable Trust & an Irrevocable Trust?
When you're exploring what a living trust is, you might also come across the phrase "revocable trust." With any revocable trust, you can change your mind, alter its provisions and even dissolve it completely. A living trust is also generally known as a revocable living trust.
On the other hand, an irrevocable trust cannot be altered after the trust is created. An irrevocable trust may help you avoid estate taxes and protect your assets from future creditors, depending on the laws of your state. Consider speaking with a legal expert for more information.
Which Assets Can Be Held in a Living Trust?
Your living trust can be used for a variety of assets, including cash, brokerage accounts, stocks, bonds, non-qualified retirement funds and annuities. You can also include personal property, such as real estate, electronics, jewelry, furniture, motor vehicles and antiques.
With a living trust, you can add assets as you acquire them, even after the trust has been created. Because you may also be the trustee, you can sell or distribute the assets in the trust as you see fit. Certain assets cannot be held in trust, including qualified retirement accounts and health savings accounts.
Because rules differ, depending on circumstances, you may want to review whatever assets you want to put into a trust with an estate planning attorney. You should also keep in mind that some of the assets mentioned above generally have their own beneficiaries, so if you want the trust to be paid, you'll want to make sure it's listed as the beneficiary.
Does a Living Trust Go Through Probate?
The probate process, which is how the courts review and determine the validity of a will, and ensure creditors are compensated, can be expensive and take time. A living trust does not require probate approval. Your executor may also have to hire an attorney and attend numerous court hearings over an extended period. A living trust may help save money and could allow your beneficiaries to receive your assets more quickly.
Probate court documents are also part of the public record, so information about your finances and estate can become public in probate. By avoiding the probate process, a living trust can help protect your privacy.
As you decide whether a living trust is right for you, you likely want to consult an estate planning attorney. They can help you understand all of the requirements and limitations of a living trust. You may also want to look into the tax implications and costs of establishing a living trust to determine how much it could affect you, your family and your assets.
A living trust might be worthwhile if you want to exercise control over your assets and want protection in the event you can't make your own decisions. It also could be worth considering if you want to help your beneficiaries avoid the probate process.