Living Trusts: Facts and Fiction

Estate planning, simply put, is the management and distribution of one’s assets after their death or incapacitation. Its primary objective is to distribute a person’s estate to its rightful heirs, with a focus to reduce estate tax. Of the many methods involved in estate planning, the two basic ones are writing a will and setting up trust accounts. Both of them have their own set of pros and cons. However, contrary to popular belief, a will might not be the best choice because it involves a probate. 

A probate is the involvement of the judiciary to make sure that your assets are distributed according to your will. Nonetheless, the method has come into disrepute because of its tediousness and high legal fees. It can also be time-consuming and may compromise the privacy of the family members. On the other hand, a living trust avoids the involvement of a probate and circumvents the need to go to court. 

What is a Living Trust?

A living trust is an agreement between the grantor and the trustee, made when the grantor is alive. The grantor transfers the assets to the trustee, who is then responsible for the management and distribution of the grantor’s assets, based on their agreement. 

A living trust is usually of two types: revocable and irrevocable. As the names suggest, revocable living trusts are those whose terms can be amended or revoked by the grantor anytime, while irrevocable trusts are those that cannot be revoked by either party. Owing to their flexibility, revocable living trusts are a preferred option for many estate planners. 

Top 6 Must-know truths about Living Trusts

Living trusts are a rather misconstrued topic. Amidst all the fiction, here are some facts about living trusts that all estate planners and inheritors should know:

1. Avoids probate

A common reason why living trusts are preferred over a will is the fact that they help you avoid probate. By creating a living trust, you transfer all your assets to the trust, thereby making them the legal owner of your assets. With a trust in place, the court has no further role to play in the case of a grantor’s death or incapacitation. This keeps your internal family matters from being exposed to the court.

2. Protects minor children

Upon the death or incapacitation of the grantor, the trust can hold the money if the beneficiary is a minor. The trust can distribute the money to the heir once they are adults, or as stated in the agreement.

3. Manages your finances when needed

The trust manages the assets even if the grantor is incapacitated, leaving the court out. In cases where grantors are worried about the inheritors misusing their money or not being prepared to manage it efficiently, living trusts step in to ensure the proper management of money as per the grantors will.

4. Ensure privacy

With a probate in place, the matters of your will can get on public records of a surrogate court. Personal information, like asset value and the names of beneficiaries or inheritors, are put on public records for anyone to see. This can be avoided through a living trust, which is a private and secure document.

5. Looks after you

For people who are unmarried and do not have children, a living trust can take decisions on your behalf, if you were to become incapacitated. Living trusts also guard against situations of marital discord. This is beneficial for people who may doubt their spouse’s creditability to manage their money if they are not around.

6. Avoids gift-tax

Lastly, transferring your assets to a living trust does not incur gift-tax consequences.

4 Myths surrounding Living Trusts?

There are many exaggerated statements surrounding a living trust. Some common claims that are far from the truth are discussed below:

1. Living trusts save you from taxes

Despite the claim by many ardent advocators of a living trust, they do not save you from the estate or income taxes. When the grantor is alive, he retains the ultimate ownership of the assets. All incomes generated from the trust are counted in the grantor’s income, which invites usual income tax. Even after his death, the assets are transferred to his estate after incurring usual federal estate taxes. All the promotions of saving taxes by using a living trust remain an illusion.

2. They are inexpensive and save you from paperwork

A living trust can be expensive to build and maintain, sometimes overrunning the cost of a will. There are legal fees involved in creating and transferring assets to the trust. A lawyer’s fees, generally, run up into thousands of dollars. Even the paperwork is a tedious process. There are many ready-made solutions available on the internet, but mere copy-pasting from online sources can do more harm than good.

3. They help you avoid creditors

Since the ultimate ownership of the assets of the trust is retained by the grantor, they can be subjected to creditors. However, this can be guarded by inserting a spend-thrift clause in the agreement like in a will.

4. There exists no other way to avoid guardianship

Proponents argue that a living trust is the best way to get a guardian approved. However, a durable power of attorney can also be used to safeguard your assets in case of incapacitation or death. They are less expensive to hire and can make decisions on behalf of the grantor. 

To sum it up

Living trusts are undoubtedly a great estate planning vehicle. They have many advantages over a will. In fact, one of the main reasons they are advocated for so diligently is because they minimize legal interference by the court. A probate, on the other hand, is a time-consuming and expensive process that can bring your internal family matters into the public spotlight. Having a living trust ensures that your family is not caught up in court proceedings at a difficult time in their lives. Nonetheless, it cannot be regarded as a panacea and eliminate the need of a final will. 

There are many myths surrounding a living trust which are baseless or perhaps only partly true. Consult a financial advisor to understand how living trusts work and if opting for one is the ideal path for you.