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Leaving a Legacy

What Is a Living Trust and How Does It Work?

What Is a Living Trust and How Does It Work?

6 Minute Read

Not sure you get all the fuss about living trusts? Maybe you push it off as something only rich people use. But did you know that almost anyone can set one up as a part of their estate plan? The real question is: Are they really the best option for you and your loved ones?

We’re here to lift the haze a little for you and give you some straight answers. Here we go!

What Is a Living Trust?

A living trust is a special kind of fund that can own someone’s stuff while they’re still living. The key word here is living. Just like all trust funds, a living trust spells out how to distribute what’s in the trust after the original owner dies.

Almost anything can be placed into a living trust. If it has value of any kind, it can be included. For example, not only real estate, vehicles and jewelry, but also mining rights and intellectual property can have their place in a living trust.

How Does a Living Trust Work?

When a living trust is formed, the one who owns the stuff (the grantor) transfers the ownership of their assets to the trust itself. They take the deed to the investment property they own, scratch off their name, and put it in the name of the trust. From that point on, they don’t own the property anymore.

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They’ll do the same thing with the titles to their vehicles, documents from their financial accounts, and anything else they want to put in the name of the trust. This process is called funding the trust, and the items together form a trust fund.

The trustee is named by the grantor in the trust document to make sure the instructions in the trust contract are carried out. The trustee might be a relative or could be an appointed professional trustee, usually from a financial institution.

From that trust fund, the grantor can leave a full inheritance to their heirs (called the beneficiaries). They can also choose to establish certain conditions that a beneficiary needs to meet before they can receive the inheritance. For example, maybe their granddaughter has to finish her degree before she gets the car.

Once a trust is set up, nothing is set in stone. Most can be changed.

Types of Living Trusts

There are only two main types of living trusts: revocable trusts and irrevocable trusts.

Revocable Trust

The revocable trust is by far the most common type of living trust. So much so that people refer to it simply as “a living trust,” or “a living revocable trust.” Just as the name implies, a revocable trust can be changed or revoked—canceled—by the grantor. It’s a rather involved process to change it, but it can be done.

Irrevocable Trust

Once prepared and signed, the irrevocable trust is active and cannot be changed, even by the grantor. Okay, well, a judge can order a change in special circumstances. Many people prepare the revocable trust first and convert it to an irrevocable trust later.

Keep in mind: Once the grantor has died, his revocable trust automatically converts to an irrevocable trust, because he’s the only person who could have changed it.

Advantages of a Living Trust

So, what are the benefits of a living trust? Here aew some of the advantages:

  1. Saves time and money in the probate process – Remember, your living trust names a trustee who can immediately take care of your end-of-life affairs—like paying for funeral costs and distributing property to heirs—without having to wait on the probate judge. The trustee’s ability to do this also saves most of the probate costs.

  2. Offers more protection if challenged – A living trust is less likely to be challenged in court than a will. It’s harder for the challengers, because they would have to prove you were coerced into signing the documents and forced to go through the whole process of funding the trust. Proving this would be difficult!

  3. Protects privacy better – Remember, a will is a public document, so anyone can get a copy of it after your death from the county records. But a living trust is totally private. With a trust, no one can know the details without the trustee sharing that information.

Disadvantages of a Living Trust

Don’t decide too quickly, though! Not everything is all rosy with the living trust. Here are a few issues that could make having one a hassle:

  1. Personal inconvenience – Since it’s set up before you die (remember, it’s a living trust), none of the stuff in the trust is your property anymore. It’s the property of the trust. So, if you want to sell something that’s already a part of the trust (like your house or car), you have to contact the trustee (if it’s not you) to take it out of the trust before you can sell it.

  2. Attorney fees – Trusts can be costly to set up. While you can easily get a will online, setting up a trust usually requires an attorney—complete with attorney fees—and will cost a couple thousand dollars to set up initially. If you choose to have a living trust and need to make a change, you’ll have to use the attorney all over again, which means even more fees!

  3. Retitle and re-deed process – After the attorney sets it up, he’ll give you some homework. You’ll need to retitle or re-deed property and other items so that the fund is named as the owner. If you don’t do this, the trust doesn’t do any good for you or your beneficiaries. You’ve paid for the blanket of protection but never put anything under the blanket! Many trusts are established but never funded.

Living Trust vs. Will

You’ll find that a living trust and a will may have a bit of overlap in the way they work, but they have some differences too. Remember, a will is a legally binding document that tells everyone how you want everything you own to be handled after you die. Here are some other differences:

  1. A living trust is not a public document like a will. If you have nosy relatives who want to know how things were distributed, a living trust protects that information.

  2. A living trust also helps you to skip those pesky probate costs. Any property given through the last will and testament is subject to probate. When given through the trust, it isn’t!

  3. A living trust can’t appoint a guardian for your children. Only a will can do that.

Do I Need a Living Trust?

While there’s not a one-size-fits-all answer, the vast majority of the population can get by without using a living trust. Dave Ramsey says, “A simple will is perfect for 95% of the population.” In other words, unless you have a really big estate.

Whatever you decide, you’ll want to act on your decision. Good intentions don’t count for much! Be prepared by at least having your will in place. It’s important for your peace of mind and for your loved ones’ financial protection and well-being.

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