Basic estate planning begins with a will. Almost everyone should have one. However, there might be a better estate planning tool for you called a living trust (or an inter vivos trust). A living trust is a legal entity that allows you (the grantor) to place your assets in the trust and still use them during your lifetime. There are two types of living trusts: irrevocable and revocable. An irrevocable living trust is a trust that for the most part cannot be changed after the trust is formed and funded. On the other hand, a revocable living trust can be changed or canceled at any time.
Revocable trusts are attractive estate planning tools and here are five reasons you need a trust today:
- Plan for Mental Disability: One of the most important reasons you need a trust is to plan for mental incapacitation. If you become mentally incapacitated and can no longer manage your own affairs, your successor trustee (someone you appoint to take over in the event that you can no longer manage your assets) steps in to manage your trust assets. Additionally, your loved ones would not need to ask the courts to appoint a guardian or conservator to manage your affairs, as they would be required to do if you only had a will. The trust documents can specify how it will be determined that you are indeed mentally incompetent.
- Avoid Probate: A living trust does not get probated. Probate is the court-supervised process that is required when you die (with or without a will) to pass your assets to your heirs and beneficiaries. The probate process can be very time consuming, lasting months or years. The process can also be expensive because of court costs, attorney fees, and executor fees. Probate can cost up to 10-15% of your estate. Additionally, none of your assets can be distributed until the probate process concludes, which can leave your loved ones in financial duress after your death. If you own property in multiple states, you must go through the probate process in each state. Assets transferred into a trust do not need to be probated. They can be distributed immediately upon your death or on the occurrence of any major events or dates that you chose.
- Control of Assets After Death: A living trust allows you to control your money and property after you die. For example, you have the option to leave money to a loved one immediately upon your death or you can distribute the money on a significant birthday. You also have the option of leaving your money with a third party, such as a financial institution to be given to a loved one in as many increments that you decide. You can also keep money away from your beneficiaries' potential creditors.
- Privacy: A living trust gives you and your loved ones more privacy. Unlike a will, that has to be submitted to probate, a living trust is a private document. Therefore, it does not become a matter of public record for anyone to read. Other than the beneficiaries – and in some states, heirs – no one else is entitled to know what you owned and whom you left it to.
- Any Size Estate: Contrary to popular belief, a living trust can be used for all estate sizes. It is a long-standing myth that trusts are for the wealthy. Many of the benefits of living trusts are equally beneficial for individuals with modest earnings as well.
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While living trusts have many advantages over wills, they must be formed and funded correctly to work. A living trust is an empty vessel until you transfer your assets into it. You want to transfer as many assets as you can into the trust for it to be most effective. For most items, this means creating a list and attaching it to the trust. For other items that have title documents, like real estate, you must retitle those assets in the trust's name. After you retitle the assets you may continue to use them as you normally would. These are only the most common reasons you need a trust. There may be additional reasons specific to your estate.