Why Do You Need a Living Trust

Living trust and Estate Planning text on Document form and Gavel isolated on office desk. Bangoland/ShutterStock

Passing on assets to one’s kin after passing away can be done several ways. Making a will is the most common method. It successfully passes your possessions to the designated individuals, but only after going through probate and estate taxes. A better method for some people is to make a living trust, which also provides you with some excellent benefits.

Two Types of Living Trusts

Living trusts are available in two forms—a revocable trust or an irrevocable trust. Each one has its own benefits and downsides—depending on the goal of creating the trust.

The owner of the possessions, called a “grantor” makes the living trust while still alive. As long as he or she is still living, changes to a revocable trust can be made at any time. Changes can involve the contents or the beneficiaries—or may cancel it altogether.

The Difference Between a Living Trust and a Will

A will only becomes valid after the death of the testator—the one who wrote the will. Up until that time, it can be changed; after death—it is permanent, but may be challenged by other parties. Also, the proceeds of a will are made public. If privacy is desired, most often the proceeds of a trust are kept private.

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The Benefits of a Living Trust

A trust has several attractive benefits that a will does not. They include:

One of the least favorable aspects of a will is that the assets in it are taxable and often must be distributed by a probate court. The laws differ in each state, but smaller estates often do not need to go through probate. LegalMatch provides timelines for some states so you can know what to expect.

Your estate can significantly be reduced by taxes, possibly even requiring that property be sold to pay taxes or debts still owed. A will offers no protection from creditors.

Although a will is often settled within about six to nine months, larger estates can take up to several years. A living trust is usually settled much faster, depending on how it is set up.

A living trust can avoid probate court and taxes. This is a situation where there is a difference between revocable and irrevocable trusts. Because the assets in a revocable trust remain under your control and are not passed into the estate until death, they are taxable, says Investopedia.

In an irrevocable trust, the assets going into the trust are under the control of a designated trustee. He or she is appointed when the trust is created. You no longer control those assets and they do not go into your estate when you die. Because you no longer control them, you will not pay any taxes on those assets in the trust.

Another benefit of an irrevocable trust is that your assets are protected from creditors. To ensure this protection, lawyers need to set it up for you. A lawyer that specializes in estate planning should be used for this purpose.

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Irrevocable Life Insurance Trust (ILIT)

An Irrevocable Life Insurance Trust, or ILIT, is a type of living trust based on one or more life insurance policies. The trust must own (irrevocable) the insurance policy and all money must go to the trust upon the death of the insured. This keeps the proceeds from the policy out of the estate, says Investopedia.

This kind of trust is an excellent tool if you do not have the money for an inheritance for one or more of your children. The trust is not funded until you die, but other types of assets can be given to it, says SmartAssets. Because the trust owns the policy, once established, the grantor has no power to change it.

Smart Asset also mentions that it may take up to three years for the benefits of an ILIT to be seen. This is true if you are making payments on the life insurance policy. The exception is if you fund the trust with money to pay the premiums.

If you have considerable possessions, you may want to create what is called a “pour-over-will,” as well as a trust. This document, says Freewill, is a catch-all, and anything not mentioned as property of the trust gets transferred to it on death. Once there, it is distributed according to the guidelines of the trust—established by the Declaration of Trust.

Primary Purpose of a Trust

When creating a trust, you can expect to pay between $1,500 and $2,000—more if there are a lot of assets. This likely puts it out of reach for many people. One of the primary purposes of creating a trust is to protect property, says LegalMatch. Without the protection of a trust, the property may need to be sold during probate to pay taxes, or settle debts.

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You may need to think twice about putting some types of property into a living trust. Legal Match says that it is not a good idea to put a vehicle into it; interest in a corporation—because percentage ownership can be difficult to determine; or real estate that is co-owned.

Getting a lawyer to create a living trust for you is the way you want to go, rather than doing it yourself. There are many possible legal loopholes and problems that may be encountered at settlement, preventing your assets from going to the person you designate.

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.