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Understanding Living Trusts
A living trust (also called a revocable trust) is a legal entity created during your lifetime to hold and manage your assets. As the grantor, you transfer ownership of your assets to the trust while maintaining control as the trustee.
Upon your death or incapacitation, a successor trustee takes over to manage or distribute assets according to your instructions, avoiding the probate process entirely.
Types of Trusts
- Revocable Living Trust: Can be modified or terminated during your lifetime; offers flexibility but no tax benefits
- Irrevocable Trust: Cannot be easily changed once established; provides tax benefits and asset protection
- Special Needs Trust: Provides for disabled beneficiaries without affecting government benefits
- Charitable Remainder Trust: Provides income during lifetime with remainder going to charity
- Generation-Skipping Trust: Transfers assets to grandchildren, minimizing estate taxes
Key Benefits of Living Trusts
- Probate Avoidance: Assets transfer immediately without court involvement
- Privacy Protection: Trust terms remain private, unlike wills which become public record
- Incapacity Planning: Successor trustee can manage assets if you become incapacitated
- Flexibility: Can be amended or revoked during your lifetime (revocable trusts)
- Continuous Management: No interruption in asset management upon death
- Multi-State Property: Avoids probate in multiple states for out-of-state property
Trust Components and Parties
Grantor/Settlor: The person who creates the trust and transfers assets into it
Trustee: Manages the trust assets according to trust terms (often the grantor initially)
Successor Trustee: Takes over management upon grantor's death or incapacity
Beneficiaries: Individuals or entities who receive trust assets
Trust Property: Assets transferred into the trust (real estate, investments, personal property)
Assets to Include in a Trust
- Real estate and property deeds
- Bank and investment accounts
- Business interests and partnerships
- Valuable personal property (art, jewelry, collectibles)
- Intellectual property rights
- Life insurance policies (as beneficiary)
Funding Your Trust:
Creating a trust document is only the first step. You must "fund" the trust by transferring asset ownership from your name to the trust's name. Unfunded trusts provide no probate avoidance benefits. This process includes re-titling accounts, updating deeds, and changing beneficiary designations.
Trust vs. Will: Key Differences
- Probate: Trusts avoid probate; wills must go through probate
- Privacy: Trusts remain private; wills become public record
- Cost: Trusts cost more upfront but save on probate expenses
- Time: Trust assets transfer immediately; wills take months or years
- Incapacity: Trusts provide management during incapacity; wills only apply after death
- Contestability: Trusts are harder to contest than wills
Potential Drawbacks
- Higher initial setup costs ($1,500-$5,000+ with attorney)
- Ongoing maintenance and administration requirements
- Must actively transfer assets into the trust
- No tax advantages with revocable trusts
- Complexity in managing trust-owned assets
- Potential refinancing complications for trust-owned real estate