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Living Trust

A trust created during an individual’s (trustor's) lifetime where a designated person (the trustee) is given authority to manage the trustor's assets

What is a Living Trust?

A living trust is a specific type of trust created during an individual’s lifetime, known as the trustor, where a designated person, the trustee, is given authority to manage the trustor’s assets for the benefit of the eventual beneficiary once the trustor passes away.

 

Living Trust

 

Understanding Living Trusts

In some cases, a living trust can also be referred to as an “inter-vivos trust.”

Considering a living trust is established while the trustor is alive, they are able to access assets such as cash, real estate property, and investments outlined within the trust while they are still alive. This is not the case for other trust types, such as a testamentary trust.

When a living trust is created, it is either designated as revocable or irrevocable.

When a trust is created as revocable, the trust can be altered or terminated by the trustor during their lifetime.

If the trust is created as irrevocable, the trust cannot be changed by the trustor once it is initially established.

 

Will vs. Living Trust

When analyzing the description of a living trust, it is not uncommon to think that a living trust is the same as a legal will. Although similar, they are not the same thing.

 

Will vs. Living Trust

 

As previously mentioned, a living trust is a type of trust that is created during the trustor’s lifetime. Once the trustor has passed, the assets outlined in the trust agreement will then be dispersed to the chosen beneficiaries.

In business law jargon, a will is referred to as a testamentary trust. These types of trusts differ from living trusts due to the fact that a testamentary trust will only take effect after the death of the trustor, not during their lifetime like a living trust.

In addition, once the trustor has passed away, probate will occur in order to determine the authenticity before the testamentary trust can be officially created.

Probate is the legal process of a will where it is reviewed in order to determine if it is accurate, valid, and authentic.

 

Uses and Benefits of a Living Trust

A living trust can be used for a wide array of objectives, such as wealth preservation, estate planning, and tax advantages.

Described below are some of the extensive uses and benefits of establishing a living trust:

  • Wealth Security: Provide income for your future while preserving current wealth for the eventual allocation to the chosen beneficiaries.
  • Probate Avoidance: Reduction of probate costs and avoidance of time delays that are associated with the proceedings of probate after death.
  • Flexibility: Establishing a living trust allows the trustor to make changes to the trust document while they are still alive.
  • Societal Well-Being: It is an option to use a living trust to support charitable organizations. This allows the trustor to donate to a charity while securing advantageous tax credits.
  • Fee Reduction: Eliminate or reduce executor payments for estate administration.
  • Capital Gains: Cease existing capital gains on appreciating assets within the trust and transfer any future capital gains to the chosen beneficiaries.
  • Privacy: Once the trustor passes, records and information on asset allocation remain secure and private. Unlike wills, these documents will not become public records.
  • Support: Provide beneficiaries with special needs or disability benefits that support them financially and prevent them from managing their own financial affairs.

Establishing a living trust is an excellent way to create financial security for your future bloodline all while retaining current income.

 

Drawbacks of a Living Trust

Understandably, it may seem like a living trust only brings forth advantageous results, but unfortunately, there are some minor downsides.

  • Planning Expenses: Creating a living trust can become an expensive option due to legal obligations while designing a trust agreement. In most cases, establishing a living trust can cost in the range of $1,500 – $2,000.
  • Maintaining Trust Records: Beyond the initial establishment of a trust, it is important to monitor the agreement on an annual basis and make adjustments based on the trustor’s current financial or social situation.
  • Re-titling Property: When a living trust is first established, property within the trust must be re-titled in the name of the trust. The process requires additional time and legal fees.
  • Nominal Asset Protection: When establishing a revocable living trust, there is very little asset protection if the trustor retains an ownership interest. This can be seen when the trustor names themselves the trustee.
  • Tax Consequences: If an individual decides they would like to establish a revocable living trust, they will not receive the same tax benefits. Assets will continue to incur taxes on income and capital gains and will be subject to creditors.
  • Administrative Costs: Beyond the expenses incurred when initially establishing a living trust, additional professional fees are needed, such as investment advisory.

For the most part, establishing a living trust is a highly beneficial option to preserve wealth and ensure security for your future. Still, it is important to be aware of the possible disadvantages that the trust may deliver.

 

Learn More

Thank you for reading CFI’s guide to Living Trust. To keep advancing your career, the additional CFI resources below will be useful:

  • Contingent Beneficiary
  • Best Personal Finance Software
  • Special Needs Trust
  • Wealth Management Course
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