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If you’ve started investigating your options for your estate, you may have come across the term “living trust” in your research. A living trust can be an important vehicle in estate planning and may be a valuable complement to your will.
Specifically, living trusts offer more flexibility over how assets are distributed and can help you avoid some of the legal pitfalls, costs and inconvenience of gifting certain assets through a will.
When your loved ones’ financial future and security are on the line, it’s important that you are able to make educated decisions about your estate. Below, we review the pros and cons of living trusts so you can decide if this strategy is a good fit for you.
What Is a Living Trust?
The most basic definition of a living trust is any trust you create while you are alive. This distinguishes it from a testamentary trust, which is created as part of your will.
A living trust allows you to set aside assets to be distributed to beneficiaries upon your death. In this legal arrangement, you appoint a trustee, who is responsible for administering and managing the trust on your behalf.
Individuals who choose a living trust as part of their estate planning usually do so for one or more reasons: to avoid taxes, circumvent probate, protect assets, and gain more control over how assets are distributed and managed.
Most clients opt for a revocable living trust, which means that you (the grantor) can alter it during your lifetime. Irrevocable trusts, on the other hand, require you to hand over control of the assets in the trust to the trustee once the trust is executed. In exchange, you may be able to take advantage of certain benefits, like government assistance.
What Are the Advantages of a Living Trust?
A living trust can offer significant financial benefits for both grantors and beneficiaries. Specifically, many people choose to set up a living trust in order to:
- Avoid taxes. A living trust can be set up in such a way that it will minimize estate and capital gains taxes on assets passed to beneficiaries.
- Avoid probate. A trust can help beneficiaries avoid the probate process, allowing assets to be distributed immediately upon your death and eliminating the need for a probate attorney or court, which can generate significant fees.
- Maintain more control over assets. A trust allows grantors to set conditions on the distribution of assets, which means you can maintain more control over them even after you pass. For example, you could set conditional terms that only allow assets to be distributed when beneficiaries graduate from college to ensure that beneficiaries use your holdings according to your wishes.
- Reduce the cost of nursing home care. Used properly, an irrevocable living trust can be used to retitle assets and reduce taxable income. This may allow you to qualify for Medicaid to pay for nursing home care while keeping assets in your family.
- Ensure proper administration of assets in case of incapacitation. By appointing a trustee, you’ll have someone who can manage the trust on your behalf without court intervention should you become physically or mentally incapable of doing so yourself.
What Are the Disadvantages of a Living Trust?
Though a living trust can be a powerful estate planning tool, it’s not the right choice for everyone. Disadvantages include:
- It’s not a good fit for all assets. Certain assets, like vehicles or retirement accounts, are not a good fit for a trust. When deciding which assets to move into a trust, you should consider how the value of your assets is likely to change over time and what the tax implications will be.
- Income generated from assets is usually taxable. Some assets, such as stocks or rental properties, may generate income while in the trust. This income is typically taxed at the highest possible margin.
- Certain trusts may not have the flexibility you need. When setting up a trust, particularly an irrevocable trust, it’s very important that you create terms that will meet your goals and priorities. With an irrevocable trust, for instance, you may be limited in your ability to alter the trust once executed.
- It must be managed throughout your lifetime. Trusts do not automatically adjust to changes to your family, such as divorce. Because of this, they require careful monitoring and may need to be amended occasionally.
How Do I Set Up a Living Trust?
Setting up a trust can be a very complicated process. And because trusts are legal agreements, it’s essential that they are drafted and executed properly, without vague language or unclear terms. This will ensure that your assets are distributed according to your wishes and help family members avoid potential legal action or court intervention in the event of a dispute.
For these reasons, many people choose to hire a living trust lawyer so they can feel confident that assets will be distributed efficiently and without any legal disagreements between family members. If you are considering using a trust as part of your estate planning, it’s strongly recommended that you consult with a living trust attorney before you get started.
Let Us Help You Protect Your Family Now — and in the Future
At The Law Offices of Kimberly Butler Rainen, our aim is to help those in the Andover, Massachusetts, area gain peace of mind that their loved ones will be protected after they pass on. We know that every family is unique, so we strive to offer personalized solutions that will meet your needs and ensure that your family obtains the maximum benefit from your assets.
We’re here to answer your questions about trusts, wills, probate, guardianship, conservatorship or anything else you need to know about estate planning. Contact us today to schedule a consultation and begin planning your family’s future.
What Is the Cost of Estate Planning?
While tailoring a plan to you and your loved one’s needs is certainly more expensive than creating a will online, when it comes to estate planning, you get what you pay for.
Estate planning is a worthy investment regardless of the size of your bank account. Furthermore, it only makes sense that the more assets you have, the more careful you will want to be about what happens to them — and who gets to control them. Complex estate planning can cost a pretty penny up-front, but this is almost always a fraction of what would otherwise be lost to taxes, probate and other lost benefits, such as tax exemptions and the cost of eldercare.
At The Law Offices of Kimberly Butler Rainen, we are here to make the process of estate planning as easy as possible for you. We provide each of our clients the same comprehensive, attentive approach we have given to our family when planning for their futures. To start the conversation about planning your estate, contact our office today.