You’re trying to set up your estate plan in the best possible way for you and for your loved ones. For many people, that means setting up a trust or a living trust.
Like a will, a living trust defines how you want your assets to be distributed after your death. But a trust creates significant benefits beyond what a will can do — offering privacy and a more seamless transition of authority over your assets.
Because it’s a more involved process than drafting a will, setting up a living trust requires a bit more upfront legwork. Your attorney will walk you carefully through the process, but it’s helpful to understand how trusts work and what you’ll need to prepare.
What is a living trust?
First things first, a living trust (sometimes called a revocable living trust) is one that is active while you’re still alive — hence, a living trust. The other primary type of trust is a testamentary trust, which is incorporated into a will. Because it’s in the will, it doesn’t become active until the writer of the will has passed away. Testamentary trusts still have to go through probate to be activated.
The person who creates a living trust is called the grantor. In most cases, the grantor names themself as trustee during their lifetime.
Because the grantor is also the trustee, they can put any assets they want into the trust and maintain control over them during their life. They can take assets in and out of the trust. They can sell things. They can get rid of the trust altogether. They have complete control.
Assuming the grantor has not eliminated the trust, when the grantor dies, all remaining assets in the trust are transferred to the beneficiaries.
What is the purpose of a living trust?
People create trusts for many reasons. These are the most common benefits:
- Probate avoidance. Probate can be a lengthy, expensive, and time-consuming process. When all of an estate’s assets are in a trust, those assets can be distributed directly to beneficiaries without involving the probate court.
- Privacy. Anything that goes before a probate court is public record. Because assets in a trust don’t have to go through probate, information about the contents of the estate remains private.
- Ease of transition. If the grantor trustee becomes incapacitated or dies, the successor trustee automatically takes over administration of the assets in accordance with the grantor trustee’s instructions.
- Protection of minor’s assets. For individuals leaving money to minor children or grandchildren, a living trust creates a useful structure. The trustee can set a date for the minor to take control of the assets and name a successor trustee to manage the funds on the minor’s behalf until that date. This system can also work well with people who are physically or mentally unable to effectively manage the funds.
- Creditor protection. Trusts can be structured so that it’s very difficult for creditors of the beneficiary to come after funds in the trust. The trustee has discretion over whether to make payments to the beneficiary’s creditors, so creditors aren’t able to demand trust money.
Setting up a living trust
Because a living trust is a complex legal structure, you’ll need to hire an attorney to help you set one up. Here are the things you need to get started.
Identify all your assets and locate any paperwork
Before you can put your assets into a trust, you need to know what assets you have. Of course, you’ll want to include big things like your house, any insurance policies, and cars. But don’t forget about smaller assets, like jewelry or family heirlooms.
Your attorney will need the paperwork — deeds, titles, etc — for any assets they’ll be putting into the trust.
One note: you can’t put IRAs or other retirement accounts into your trust, but you can make your trust a beneficiary of those accounts. Talk to your attorney about whether that makes sense in your case.
Choose your beneficiaries
The beneficiaries of your trust will receive the assets upon your death. You can name as many beneficiaries as you want, and they don’t all have to be people. You can name institutions or charitable organizations if you’d like. You can even name pets as beneficiaries of your trust
Now would also be a good time to determine whether you want any restrictions on the beneficiaries. For instance, if your children are beneficiaries, do you want them to have full access to the funds when they’re 21? Not until they’re 30?
Note whether you have different beneficiaries named on life insurance policies or retirement accounts so you can discuss any potential conflicts with your attorney.
Choose a successor trustee
You are the trustee of your trust during your lifetime — that allows you to have complete control over the assets. Upon your death or if you become too ill or incapacitated to manage your assets, you’ll need a successor trustee.
It probably goes without saying, but you should choose someone you trust. They’ll have a fiduciary duty to oversee the distribution of your assets in accordance with your instructions.
Transferring assets into your trust
Once you set up the living trust, you have to fund it. That means you’re transferring legal ownership of those assets from yourself to the trust.
A trust that isn’t funded is completely ineffective. If your house isn’t transferred into the trust, then it’s not in the trust. The house would have to go through probate upon your death, and it may not end up with the beneficiary you intended.
To place your home in the trust, your attorney will transfer the deed to your home into the name of the trust rather than your name. If you’re transferring a vehicle into the trust, you’ll need a title change form from the Department of Motor Vehicles.
Your attorney will be able to help you with this process, but it’s helpful to understand the change in ownership.
Creating a pour-over will
We just went over how to set up a trust. Why do you need a will now?
It’s a good question.
And the answer is that it’s always good to have backup. A pour-over will ensures that any assets not in your trust will be transferred there upon your death. Of course, your intention is to transfer all assets into your trust when you set it up and throughout your life.
But things happen. Perhaps something gets left out or you receive funds right before your death. With a pour-over will, you’ll have a complete trust so your loved ones can avoid probate, and all your assets will be distributed as you wanted.
With careful planning, you can manage your assets in the most effective way for both you and your loved ones. We’ll not only help you set up and fund your trust. We can offer advice and guidance about choices like naming beneficiaries and when children should inherit money.
Call, email, or schedule a consultation online. We can help you set up a living trust that works for you and your family.
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