Advantages of a Living Trust

"What is a living trust?" A living trust, also known as an inter vivos trust, is a trust you set up during your lifetime that allows you to control the assets contributed to the trust. The trust is a separate legal entity. You can transfer any of your personal assets, such as mutual funds, stocks and other investments, your home and other real estate, vehicles or any other property you own to the ownership of the trust.

Advantages of a living trust
One of the principal advantages of a living trust is control. When you transfer ownership of your assets to a living trust, you keep control over the assets. You name the trustee and the beneficiaries, and you direct how property, and income from the property, is to be distributed during your life and upon your death. You can be the trustee yourself as long as you live, if you wish.

While you are living, the trustee of your living trust is responsible for managing the property held in the trust as you direct, for your benefit and the benefit of your beneficiaries. Upon your death, the trustee who you designate is generally directed to pass the property in the trust to your beneficiaries, outside of probate, or to continue to manage the property in the trust for your beneficiaries.

Avoiding probate is one of the principal advantages of a living trust. Probate can drag on for months, and your beneficiaries will not be able to use the assets in your estate until the process is complete. In addition, the costs of probate are charged against your estate, reducing its value.

Since the assets in the trust are not part of your probate estate, the trustee can get them into the hands of your beneficiaries faster. You could also provide that the assets be held until the beneficiaries reach a certain age or meet some other criteria. And since the trust is not subject to probate, you can keep the terms of the trust private.

If you have investments in the trust, you can choose a financial professional as a trustee to manage the funds on a day-to-day basis, thereby freeing you from this responsibility even while you maintain control over investment goals and strategies. If you have tax-advantaged retirement accounts, such as IRAs or a 401(k), you can direct them to be held in the trust until the beneficiaries reach age 59 ½, thus avoiding tax and early withdrawal penalties.

Once your living trust is set up, you must fill out the paperwork needed to transfer title to your assets from your name to the name of the trust. For example, to transfer your house to your trust, you need to sign a new deed, showing that you now own the house as trustee of your living trust.

Revocable and irrevocable living trusts
With a revocable living trust you can make changes to the trust, or terminate it at any time. For example, you may want to take certain property out of the trust or change the beneficiaries. Or you may decide the trust no longer serves your needs. A living trust gives you this flexibility. An irrevocable trust cannot be amended or revoked once you have created it.

Ownership is the chief difference between revocable and irrevocable living trusts. With a revocable living trust, you are still considered the owner of the assets. This leaves your assets vulnerable to legal settlements and creditors. In an irrevocable trust, you no longer have ownership, so the assets are protected from financial liabilities.

You can avoid probate with either a revocable or irrevocable trust. You do not avoid estate taxes with a revocable trust, but the assets in an irrevocable trust are not subject to estate tax, since you did not own the assets at the time of death. The assets in an irrevocable trust can be structured to defer or reduce capital gains taxes, but those in a revocable trust cannot.

Who should you choose as a trustee?
Since the trustee will be handling your personal financial affairs through the trust and will be making distributions of property to your family and other beneficiaries, you will obviously want to choose someone of trust to both you and your family. The trustee should be someone you know well and have worked with before. Objectivity can be important, since the trustee will have to make distributions, based on your instructions, in an impartial and fair manner.

You also want to choose someone who is professionally capable of handling the responsibilities and carrying out the necessary procedures. Your trustee can seek assistance and guidance from other professionals regarding more technical issues, but should generally be someone who is capable of handling the administrative duties involved.

You may want to grant your trustee a durable power of attorney. The trustee of your living trust has power over the assets in the trust, but you may want to grant power in areas outside the trust, such as for bank checking accounts, which are not normally transferred to a living trust. With a power of attorney, your trustee will be able to make deposits and pay bills from those accounts.

With a power of attorney, you could also give your trustee authority to collect government benefits, file tax returns, transfer other property that becomes yours into the trust and handle any other legal matters outside the boundaries of the trust.

Special power of attorney can also be assigned to several individuals. In this arrangement, one person would be chosen to manage assets, while another is chosen to manage taxes and a third is chosen to handle legal matters. This allows you to draw on the expertise of several professionals, but care must be taken to ensure that responsibilities do not overlap and that all roles are well-defined.

If you think a trust is right for you, it's a good idea to meet with a lawyer to discuss the options available. The laws regarding trusts vary from state to state, so you'll want someone well-versed in your state's probate and tax laws.