Updated: Feb 17
A living trust is a popular consideration in many estate strategy conversations, but its appropriateness will depend upon your individual needs and objectives.
What is a Living Trust?
A living trust is created while you are alive and funded with the assets you choose to transfer into it. The trustee (typically, you) has full power to manage these assets. But using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
A living trust will also designate a beneficiary, or beneficiaries, much like a will, for whom the assets are managed to benefit upon your death. The named trustee administers your assets to support your beneficiaries.
If you create a revocable living trust, you may change the terms of the trust, the trustee, and the beneficiaries at any time. You can also terminate the trust altogether. This flexibility, of course, comes with a cost. There is some administrative work involved to re-title your assets into the revocable living trust. Your financial advisor or attorney can help you do this efficiently.
What are the Advantages of Creating a Living Trust?
The living trust offers a number of potential benefits, including:
Avoid Probate - Assets are designed to transfer outside the probate process, providing a seamless, private transfer of assets.
Manage Your Affairs - A living trust can be a mechanism for caring for you and your property in the event of your physical or mental disability, provided that you have adequately funded it and named a trustworthy trustee or alternative trustee.
Ease and Simplicity - It is a simple matter for a qualified lawyer to create a living trust tailored to your specific objectives. Should circumstances change, it is also a straightforward task to change the trust’s provisions.
Avoid Will Contests - Assets passing via a living trust may be less susceptible to the sort of challenge you might see with a will transfer.
What are the Disadvantages of a Living Trust?
Living trusts are not an estate planning solution in and of itself, and you should not exclusively depend on one. They won’t accomplish some potentially important objectives, including:
No Asset Protection - A living trust does not protect assets from creditors while you are alive. However, there may be asset protection for beneficiaries following your death. A living trust is considered a “countable resource” when determining your Medicaid eligibility.
Cost - There are costs associated with setting up a revocable living trust. An attorney drafts the document and your assets will need to be re-titled in the name of the trust.
Administration - There is some paperwork involved to re-title your assets (bank account, investments, real estate) into the trust. Not all assets are easily transferred to a living trust. For example, if you transfer ownership of a car, you may have difficulty obtaining insurance, since you are no longer the owner.
Taxes - A living trust is not a mechanism to save on taxes, now or at your death.
Your financial advisor and estate attorney can help you decide whether a living trust makes sense for your unique situation.
Has it been more than 5 years since you updated your estate plan? Would you like to bulletproof your wealth for the next generation? If you have more than $2 million saved and need help from a wealth manager, the Peak Wealth Planning team can assist.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.