A Guide to Living Trusts

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How Does a Living Trust Work?

A living trust works by designating a trustee who manages the assets and disperses them upon the person’s death. A person must create and file a living trust while alive. A living trust differs from a will because the person’s assets are held by the trustee, which allows the beneficiaries to skip probate. Because probate can be expensive and time-consuming, a living trust is often an attractive option. A living trust account might include the following assets:

• Stock and bond certificates.
• Safe deposit boxes.
• Mutual fund accounts.
• Brokerage accounts.
• Money market accounts.
• Certificates of deposit (CD).
• Checking and savings accounts.
• Cash or money owed to you.
• Life insurance policies.
• Non-qualified annuities.

Working with an estate planner can help you establish which assets you should include in a living trust. Estate planning professionals can also help you plan for taxes and liabilities, helping maximize the assets your beneficiaries receive. For example, you might not want to include retirement accounts in a living trust because the IRS could consider it an early withdrawal, leading to more fees. You might also wonder, “What is a living trust on a house?” Creating a living trust that includes real estate means you transfer ownership and control of the property.

Types of Living Trusts

The three types of living trusts are:

Revocable Trust

A revocable trust is a trust you can adjust or cancel at any time. In a revocable trust, the person’s assets are transferred to the beneficiary while living. However, the assets aren’t available for use until the donor dies. As long as you have a revocable trust, you’ll still have access to the assets in it.

Irrevocable Trust

An irrevocable trust is similar to a revocable trust, except you can’t adjust or cancel it as easily. It might be possible to cancel an irrevocable trust, but not without a court order and approval from all beneficiaries.

Asset Protection Trust

An asset protection trust (APT) is a temporary financial planning tool some people use to protect themselves from creditors. An APT assigns a grantor to your assets while still allowing you to access the funds. If structured properly — often with a spendthrift clause — an APT prevents creditors from accessing the funds. Federal rules require all APTs to be irrevocable.

Advantages and Disadvantages of a Living Trust Account

Evaluating the advantages and disadvantages of a living trust can help you decide if it’s the right estate planning tool for you. For example, one of the best ways to protect your family’s financial future is a family trust, meaning you can help them access your assets faster. The advantages of a living trust include:

• The ability to avoid probate: The probate process can be timely and expensive, cutting into the assets your beneficiaries receive. A living trust might allow them to skip probate.
• Protects your assets in the event of incapacitation: A living trust also allows your trustee to manage your assets in the event you become debilitated.
• Offers privacy: Living trusts are great estate planning tools that allow you to keep your assets private.
• Protection from creditors and debts owed: An asset protection trust can shield you from creditors for any debts you owe.

The disadvantages of a living trust include:

• You lose control of your assets: Creating a living trust assigns your assets to the chosen successor, which takes place immediately.
• There may be fees involved: In addition to living trust filing and legal fees, you might have additional costs such as that of transferring a real estate title.
• You’ll still owe taxes: A living trust doesn’t shield you from taxes. You or your successor are still responsible for paying taxes on any income generated from assets.

Living Trust vs. Will

A living trust’s meaning is often confused with that of a will. A living trust and will are different legal tools. What’s a living trust? A living trust transfers your assets to a trustee immediately after filing. The trustmaker has control over the value and timing of asset distribution after the grantor dies. A will leaves behind your assets to designated beneficiaries upon your death. Perhaps the biggest difference between a living trust and a will is the need for probate. Transferring assets through a living trust is usually more affordable and faster than with a will.

How To Create a Living Trust

It’s important that you take certain steps to ensure your living trust is both legal and easily enforceable. Working with an estate planner is the best way to create a legal living trust. A skilled professional can help you include important information while also ensuring you maximize the benefits your beneficiaries receive through the living will. While we recommend reaching out to an estate planner to create your living trust, here are a few general steps to take:

1. Choose the Type of Living Trust That Fits Your Situation

The first step in creating a living trust is deciding which type of trust makes the most sense for your financial situation. The two most common types of living trusts are revocable and irrevocable. If your goal is to make the transfer of assets as smooth as possible, a living revocable trust might be the best option. If your goal is to remove assets from your estate, an irrevocable trust might be the ideal choice.

2. Fund the Living Trust

Once you choose a type of living trust, you’ll want to establish where the funds come from. This includes steps like transferring real estate, signing over fund securities, and adding users to your bank accounts. These steps give your trustee access to your accounts and makes it easier for them to distribute funds.

3. Designate Your Beneficiaries

Make a list of your beneficiaries, including how much each person should receive. A living trust typically lists this as a percentage of your assets. Instead of listing specific assets, you can assign a percentage to each beneficiary. If you have just one beneficiary, they’ll receive 100% of your assets. If you have two or more beneficiaries, you can assign each person an equal distribution of your assets or divide it as you see fit.

4. Identify a Trustee

You’ll also want to choose a trustee you trust with your assets. A trustee is a person or institution that manages your assets under the requirements of the trust. It’s also possible to assign co-trustees, meaning more than one person controls your assets. Some people prefer to designate an institution as their trustee.

5. Sign and File the Living Trust

Once you have all the details outlined in your living trust, it’s time to make it legal. This includes reviewing each detail with an estate lawyer. Once everything is complete, you’ll need to sign it with a notary public present. Some real estate lawyers offer these services as a part of estate planning, making the process much easier.

6. Store the Original Living Trust Securely

Your estate lawyer will make multiple copies of your living trust, but you should keep the original copy. You’ll want to store it in a safe place where it won’t get lost or ruined. Consider storing the original copy in a safe deposit box or with your bank. While your estate lawyer will keep a copy, it won’t be the original. Always let your trustee know where you plan to store the original copy and how they can access it.

Help Me Create a Living Trust

Are you ready to create a living trust? Do you still have questions related to how living trusts work? Are you wondering which type of living trust is right for you? Anderson Advisors are here to answer all your estate planning questions. Contact us today to create your personal Wealth Planning Blueprint.