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Retirement planning involves identifying goals, investing for your future, and managing risk so you can enjoy a financially secure retirement. A critical step in retirement planning is to set up a living trust to protect and preserve your assets. We have created a guide to help you understand the pros of living trusts, including how they can help shield your assets by keeping them confidential and easing the transfer to your beneficiaries.

Key Takeaways

  • A living trust differs from a will in that you have more control over the timing and distribution of your assets with a living trust.
  • The two main types of trusts are revocable and irrevocable, which determine  your ability to make changes to each once executed.
  • One of the main advantages of a living trust is that it allows your beneficiaries to skip probate, which is often a costly and timely process.
  • A living trust can help protect your assets and liabilities while still living.
  • An irrevocable living trust may allow your beneficiaries to avoid estate taxes.

What Is a Living Trust?

A living trust is a financial tool that allows you to transfer your assets to a shared entity. This legal agreement helps you protect your assets and specify what happens to them after your death. A living trust also helps preserve your assets for your beneficiaries by allowing them to skip probate.

A living trust differs from a will in that you have more control over your assets with a living trust. A will designates your beneficiaries, who then receive ownership of your assets after your death. With a living trust, you maintain control of the assets while living. After your death, the living trust names a trustee who oversees the trust, including allocating assets based on your specific instructions.

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Reasons To Consider a Living Trust To Secure Your Retirement

By making a living trust part of your retirement planning goals, you can:

Avoid Probate

Probate is the legal review and transfer of an estate’s assets to its beneficiaries. It’s often an expensive and time-consuming process. Each asset you own, including properties, vehicles, and bank accounts, goes through the probate process before transferring to your beneficiaries.  By creating a living trust, you can move your assets out of your name and into a trust. Once completed, the assets belong to the trust rather than the individual, which removes the need for probate.

Specify Specific Instructions for Assets

Most trusts include specific instructions on how the trust should transfer to beneficiaries. This means you can determine precisely how you want to allocate your assets, including when and under what circumstances. You can create special situations that allow children or grandchildren to access funds for needs, such as education or marriage.

Manage Business or Rental Assets

A living trust can also be a great strategy for managing business or rental assets. If you become incapacitated or unable to make business decisions, a living trust allows your designated trustee to take over. If real estate investments or assets are part of your retirement strategy, a living trust is worth considering. A living trust allows your successor trustee to make important financial decisions and communicate with banks or lenders on your behalf. A living trust protects you while living by preserving your assets and preventing others from liquidating them on your behalf.

Protect Confidentiality

A living trust also allows you to keep your final wishes confidential. One of the most common reasons for setting up a revocable living trust is to maintain privacy, which can help protect your assets from lawsuits or creditors. If you choose an irrevocable trust, the title of any assets you own will show the trust’s name rather than your personal information.

Revocable vs. Irrevocable Living Trust

The two main living trust types are revocable and irrevocable. A revocable living trust is not permanent. For example, if you and your spouse divorce or you decide to move your assets back to personal ownership, you can do this with a revocable trust. An irrevocable trust, however, is typically permanent. Changing an irrevocable trust requires court and beneficiary approval.

Will a Revocable Living Trust Avoid Estate Taxes?

A revocable living trust doesn’t avoid estate taxes. The Internal Revenue Service (IRS) still considers revocable trusts to be a part of your estate, meaning they are still tax liable. However, the federal limit on nontaxable inheritance is $24MM. State estate taxes vary depending on the location of the trustee and beneficiaries.

Clients close to surpassing the federal threshold may instead consider an irrevocable trust. Assets in an irrevocable trust are not taxable since they’re not included as part of your estate. Setting up an irrevocable trust requires careful planning and strategizing to ensure you maximize its advantages. 

If you think you might benefit from an irrevocable trust, contact a financial advisor today for a personalized consultation.

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What To Expect When Creating a Living Trust

Creating a living trust should be part of your retirement planning strategy if you want to preserve and protect your assets. Here are the steps you can expect when drafting a living trust with your financial advisor:

Draft a Living Trust

First, your financial advisor will help you set up and name a trust into which you’ll later transfer your assets. Putting your financial assets into a living trust removes your name from them and instead transfers ownership to the trust. You’ll then name you and your spouse as the trustees of the living trust. You can list any children, grandchildren, or dependents as your beneficiaries. The great thing about a living trust is that you won’t lose control of your assets and can continue managing their daily operations.

List Assets

Include any assets you own that you want to transfer to the living trust, such as real estate, investment accounts, money market accounts, and annuities. Consider also including physical assets, such as jewelry, gold or safe deposit boxes, and life insurance policies. It’s also possible to put businesses in a living trust, including sole proprietorships, partnerships, and limited liability corporations.

Consider Non-Eligible Assets

You cannot put some assets, such as retirement accounts, into a living trust while living. However, you can name your trust as the beneficiary and pinpoint how the funds should be spent. Naming your living trust as the beneficiary means the funds will transfer to the trust after your death. The same goes for health savings accounts. Other assets that may require special planning include active financial accounts and vehicles.

Create Directions

Each living trust should include directions on how to transfer each asset. You can specify who receives what, when, and under what circumstances. Your directions may vary depending on the beneficiaries’ age, marital status, and specific assets.

Your instructions can also include who will take care of minor children. A living trust allows you to be specific, including on matters such as property transfer, vacation funds, or educational expenses, which can help your designated beneficiary care for your minor child. 

Identifying specific directions may also include adding clauses. Certain clauses, such as no-contest, mental competency, or distributions to a disabled person, are situationally specific. Working with a financial advisor may be even more important if you have any special circumstances that require careful direction.

Assign Controller

You can designate who should be in charge of your trust, known as the successor trustee. You may choose a temporary person until a child reaches a certain age. Your controller can be someone who understands your assets to help protect and manage your funds. It’s possible to assign multiple trustees to manage different aspects of a living trust. For example, you might have one person manage business assets and another personal property assets.

Make Updates as Needed

It’s important to update your living trust as asset ownership changes. If you sell or acquire new assets, you’ll need to update your living trust. You can usually change a revocable living trust through living trust amendments. A living trust amendment updates certain parts of your living trust without redoing the entire document.

Making living trust updates with Anderson Advisors is easy. As long as Anderson Advisors created your initial living trust, you can conveniently request updates via email, and our Estate Planning Department will make the changes. Of course, you can always request a living trust review with our financial advisors if you don’t yet have one or are no longer working with the original firm that drafted your trust.

A living trust offers many benefits, including preserving and protecting your assets. Not only does a living trust protect you while living, but it also helps your beneficiaries access assets easier without costly or timely probate. Contact Anderson Advisors today for a consultation, where we’ll review your living trust or help you set up a new one from scratch. We’ll help you create specific instructions to ensure your assets are allocated according to your plans.

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