A living trust is a type of trust that is formed while the trust creator is still alive. The trust property of a living trust is called the res. It is transferred from the property owner to an individual who holds the property, called a trustee.
The trustee then transfers the property to the named recipient according to the trust instructions. The recipient is called a beneficiary.
A living trust is typically less extensive than a will. It usually covers transfers of specific items of property, rather than an individual’s entire estate. There are advantages and disadvantages to creating a living trust.
What are the Pros and Cons of Using a Living Trust?
A living trust has numerous pros and cons associated with it. Depending on the needs and desires of the trust creator, the characteristics of a living trust can either be for them or against them.
Advantages of a living trust may include:
- It may help avoid probate. Property that is transferred through a living trust does not have to go through the probate process upon the death of the trust creator. Avoiding probate can save time, money, and confusion regarding the property;
- There may be tax benefits. In certain cases, a living trust can reduce the overall taxes associated with an individual’s estate;
- There is more privacy. Unlike a will, a living trust is generally not made part of the public record; and
- There may be legal protections. The creation of a living trust provides a written document that is enforceable in a court of law. If an individual challenges the transfer, the trust documents provide records of the creator’s intentions. It is typically more difficult to challenge a living trust than it is to challenge a will, since the individual is still alive.
Disadvantages of a living trust may include:
- The coverage is limited. A living trust may not cover the entire estate in the way that a will might. Therefore, the living trust documents should be fairly specific when naming the property involved;
- A power of attorney may be needed. Even when a living trust is created, it may still be necessary to create a durable power of attorney. This may be necessary because a successor trustee may not have the authority to manage property outside of the trust; and
- There may be confusion. This may be the case if the terms of the living trust conflict with other documents, such as trust and/or will documents.
As previously noted, each of these characteristics may work to an individual’s advantage, depending on their needs. For example, an individual may not want to cover their entire estate, especially if their estate is smaller and they only want to transfer a specific item of property. In these cases, the characteristics of a living trust may work to an individual’s benefit.
What Assets Should be Placed in a Living Trust?
The main goal for creating a living trust is to avoid property from passing through probate. A living trust is often an important part of an estate plan, allowing the estate holder to avoid the extra costs and time associated with probate.
The first thing an individual should do is to determine which assets to place is a living trust and which assets should pass through probate. The advantages and disadvantages of the living trust also depend on what property is included in the estate.
It is important to note that living trusts are revocable. This means the individual who created the trust may change the terms of the trust at any time during their lifetime, if they desire.
How Can You Determine Which Assets Are Best?
It may be difficult to determine which assets are best suited for a living trust, especially when an individual owns a large amount of property. It is best to begin by classifying an individual’s assets by value in order to make an informed decision regarding this important component of the estate plan.
There are benefits to placing higher value property in a living trust. In many situations, more expensive items take up more time and money during the probate process. An individual should consider including the majority of their valuable assets in their living trust to avoid this obstacle.
A living trust can also help maintain privacy if an individual does not want their ownership of property to be known to the public. A living trust does not become public record upon an individual’s death, unlike other types of trusts and/or estate documents.
It is important to note that assets that are subject to frequent sales and/or transfers are not good candidates for a living trust. This is due to the fact that the assets would bounce back and forth from the living trust when a sale and/or transfer occurred, which may be messy to keep up with.
After taking these things into consideration, an individual may be ready to decide which items of property would be beneficial to place in a living trust. Some examples of property that individuals frequently place in their living trusts may include:
- Valuable furniture;
- Expensive art;
- Antiques and family heirlooms;
- Valuable collections, such as coin collections;
- Expensive jewelry;
- Interests in small businesses, such as being part of a partnership;
- Copyright interests;
- Real estate; and/or
- Securities, such as bonds.
This is, of course, not a comprehensive list of all possibilities, and is just a few examples. An individual can decide what to include in their living trust based on what property they own. An attorney can also help review what property an individual owns and what would be beneficial to place in a living trust.
What Assets May Not Be Ideal to Include in a Living Trust?
In addition to that property discussed above which may be subject to frequent sales and/or transfers, some other types of property may not be transferred through a living trust. This may include:
- Certain retirement benefits; and
- The majority of life insurance benefits.
There are other transfer methods available for these assets in an estate plan, such as through a payable-on-death and/or transfer-on-death account. There are other assets that can be legally placed in a living trust, but may present some obstacles. These include:
- A vehicle. Vehicles are typically not included in living trusts because it is often impractical to have the insurance and registration under the trustee’s name;
- An interest in a larger business. A larger business, such as a corporation, is more complex and could present more questions about how much ownership an individual actually has in the company. This may create a roadblock to an individual’s living trust. On the other hand, an interest in a smaller business is easier to identify and manage; and
- Certain types of real estate. Real estate may be a good asset to place in a living trust because it is often valuable. However, if an individual co-owns the property with another individual, it may not be ideal, especially since they may already gain automatic survivorship rights upon your death.
The previously discussed types of property may be better suited to pass through probate. It is important to remember that since a living trust is revocable, it can always be amended as an individual’s situation changes in the future. All changes must be legally executed in order to be enforceable.
Do I Need a Lawyer for Help With a Living Trust?
Yes, it is essential to have the help of an living trust lawyer for a living trust. Drafting and enforcing living trusts can be complicated. An attorney can help you determine if a living trust is appropriate for your wishes. The attorney can help you transfer your property and set up your living trust. Additionally, an attorney can represent you during any court proceedings, should any issues arise from the living trust.