What is a Living Trust?
A tool in estate planning used to minimize probate costs upon the death of the grantor is the living trust. A Living Trust is created while the grantor is alive and typically is revocable in nature. It is designed to manage assets for the best interest of a beneficiary, usually the grantor.
Sometimes called an ‘inter vivos’, which is Latin meaning ‘within one’s lifetime’, living trusts provide a lot of flexibility to the creator while reducing costs associated with death. This article will explain how it works, the advantages, and tax implications.
How it Works
Once the trust document is prepared and signed, the grantors, usually a husband and wife, transfer the assets into the trust. This means that the title of the assets change from your personal name to the name of the trust. It’s the most cumbersome part of creating the trust. You have to change the name of the bank accounts, your investment accounts, auto’s, real estate, and your business ownership to the name of the trust. Don’t stress out over this, it takes about a year to get it done. Do it one step at a time. Start with the bank accounts and move through the other assets over time. Once done, all future transactions have the trust name used and not your personal name. It is as if you are no longer alive.
Upon death, the assets automatically transfer to the beneficiaries of your choice. These beneficiaries can be your children or another trust to care for certain individuals. Remember the primary goal here, transfer assets to the beneficiaries without probate costs. Probate costs are the legal and court costs associated with transferring title of the assets to your heirs. Typically they run about 4% of your total estate. If your estate is valued at more than $100,000, the cost to set up the trust will generally equal the costs of probate. If your estate is worth more, than it is definitely a good idea to discuss creating a Living Trust with an estate attorney.
As identified above, the primary goal is to avoid or reduce probate costs. There are two more advantages for the Living Trust:
- Speed of Transfer – since you don’t have to have the assets reported to the court, you don’t need to wait for the judge to give his blessing. This usually takes around 18 months from start to finish. If you have cash in a bank account somewhere and your children want or need this money, they will have to wait without a Living Trust in place. You see, the Trust would simply state that the particular asset’s title transfers to ______________ upon my death.
- Revocable in Nature – most Living Trusts are designed to be revocable, meaning you can change the beneficiaries, change the nature of the trust, change the way the assets are to be dispensed upon death. It’s really a remarkable tool for modifying giving changes in your life. As an example if one of your beneficiaries dies suddenly, you can quickly amend the trust document to reassign assets to a different beneficiary. This is also true if there is a new addition to the family. Any major life change in your family or life circumstances can be addressed with ease with a Living Trust.
I want to expand on the revocable aspect of a trust. It is important to understand that if you make your Living Trust an irrevocable type of a trust, it becomes an entity by law. It’s like giving birth to a living being. This entity must get a tax identification number and if you transfer title of assets to this trust, you cannot change the title back to you. It’s not that simple. It is IRREVOCABLE, meaning you can’t change the document. Any family changes or life changes have to have already been addressed in the Trust Document.
In general a living trust has no tax issues to deal with. The trust acts more like a shadow for tax purposes and just goes around with you. The IRS considers the assets in a living trust as your assets and therefore no need to file any type of separate return etc. You don’t need a special federal identification number because the trust is revocable.
However, once you make the trust irrevocable (see above), you now have an entity that must file a tax return every year. You use Form 1041 (notice its numerical position to Form 1040) to report the information each year.
For further understanding see: What are Trusts?
A Living Trust is a great way to avoid probate costs and the time it takes to transfer title to the beneficiaries. If your estate is valued more than $100,000 you should give serious consideration to creating a Living Trust. Seek help from an estate attorney. Act on Knowledge.
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