What Is a Living Trust?
Living trusts (or inter vivos trusts) are estate planning tools available under IRS rules wherein a creator establishes a trust that will go into effect while they are alive. Just as with any form of estate planning, living trusts are not right for everyone but can be beneficial to those who have certain estate planning needs and goals.
What Is a Trust?
The term trust in estate planning refers to a specific type of legally-recognized investment structure. Trusts classify property as a separate legal entity and use a trustee to distribute the funds and supervise the investment and growth of the trust. Trusts serve the purpose of giving the creator of the trust control over where the funds go and how the funds are distributed.
There are several types of trusts. As mentioned, living trust is a category of trusts created and founded while a person is still alive. The other main trust category, called a testamentary trust, only takes effect upon death. Living trusts become effective immediately as property is transferred into the trust and removed from a individual's personal property.
Types of Living Trusts
There are two types of living trusts that you can create. The first kind is a revocable living trust. This form of trust does not relinquish control of the owner’s assets until a specified time. Until that time, the owner can cancel the trust and get the assets back. The second kind of living trust is an irrevocable living trust. This trust becomes active the moment property is transferred into it and the original owner immediately relinquishes all control of the trust property to the trustee. An irrevocable living trust cannot be canceled.
Advantages of a Living Trust vs. a Testamentary Trust
There are three distinct advantages to setting up a living trust instead of a testamentary trust. First, a living trust gives complete privacy to everyone involved with the trust. A testamentary trust must still go through probate and becomes public record, whereas a living trust does not go through probate and never becomes public record. This means that creditors and solicitors will never know about the trust and its funds.
Second, living trusts, when properly planned, save estate tax money. Most families want to pass on as much of their wealth as possible to their children. A living trust allows this to happen. Irrevocable living trusts remove property permanently from an estate. This means that the property in the trust is never recognized by the IRS as owned by the donor and so they cannot pay estate taxes for it. There are exceptions and requirements for this advantage to apply, so always consult with an estate planning attorney for advice on minimizing estate tax liability.
Finally, living trusts offer people the ability to completely plan and provide for the future. This is especially important for married couples who fear leaving one spouse behind. A living trust can be established to release the necessary monthly living expenses to the surviving spouse and ensure their care and wellbeing. Once that spouse passes, the trust can continue providing for welfare of children and grandchildren or it can be donated to a desired charitable organization. All of these objectives are decided and finalized at the time the trust is established.
Tax Advantages of a Living Trust
As mentioned above, irrevocable living trusts allow the donor the ability to avoid estate taxes on property placed into the trust. Additionally, if setting up special trusts for grandchildren, you can avoid gift and generation skipping taxes by contributing through the trust. Finally, even more savings can be realized when a trust transfer plan in established setting up a route that trust funds will take upon the death of one spouse.
Who Should Have a Living Trust?
Living trusts are not for everyone. For anyone with less than $1 million in overall wealth, a living trust is not necessary because they fall into the estate tax exclusion amount. Additionally, if the majority of your wealth is invested in annuities and other accounts payable upon death, you will not need a trust because these assets do not go through probate.
Candidates for living trusts are those who have more than $1 million in wealth or who have property in two or more states or countries. If you have a business, living trusts are also a good option for ensuring smooth transition of ownership. Finally, if you have a disabled spouse or dependent child, a living trust is essential for providing proper care in the event of your death.
Do I Still Need a Will if I have a Living Trust?
You still need a will if you have a living trust. However, the appropriate will is much less complex and less revealing than a standard will. When you have a living trust, you draft what is called a pour over will. This will basically states who your personal belongings will go to at the time of your death. Additionally, if you are withholding certain assets from the trust, you can require that those assets be placed into the trust.
How to Set Up a Living Trust
Living trusts are very technical and must meet specific IRS rules. To make sure that your trust meets all legal requirements, always consult with an estate planning attorney for the drafting. You can save time and money during the drafting process by having all of your asset information and ownership documents ready for the initial meeting. If you are married, bring your spouse along so that they understand the process and what the trust will look like in the event they should survive you.