Proper estate planning ensures your assets and wellbeing will be cared for in the event of death or incapacitation. While there are several documents, such as the Will, Durable Power of Attorney, and Advanced Medical Directives everyone should have regardless of health, wealth, or age, the question of whether or not a revocable living trust is appropriate depends on your goals and objectives. Let’s take a look at the basics of revocable living trusts (which we’ll refer to simply as living trusts from here on), including a few benefits you may find attractive.

A living trust is a separate legal entity created to own assets, such as homes and investment assets.  One key feature of a living trust is the ability to maintain complete control over the trust and trust assets. Prior to death, the trust remains revocable, which means you may use trust property, amend the trust terms, or even revoke the trust entirely. At your death the trust becomes irrevocable, and depending on the terms you set, your appointed trustee may distribute the assets or continue to manage the trust for the benefit of your beneficiaries.

Living Trusts provide several key benefits. For starters, unlike a Will, which typically distributes a percentage or specific value of property in one lump-sum, a living trusts provide the ability to control the manner and timing of asset distributions to heirs. For instance, you could direct your trustee to pay the college tuition of a beneficiary, or to distribute assets when a specific milestone, such as a beneficiary’s 30th birthday, is reached. You could even use the distribution of trust assets as a reward, or enticement for a desired outcome, such as obtaining an MBA degree.

Living trust assets also avoid probate, the court supervised process your estate will go through to manage, settle, and distribute your property according to the terms of your Will. Assets subject to probate generally consist of property you own individually, while certain assets with beneficiaries, retirement plans, life insurance and property held in trust pass outside of your will and are not subject to probate.

There are several reasons you may wish to avoid probate. The first is the time factor – probate can take from a couple of months to a couple of years, and assets typically aren’t distributed to beneficiaries until the end.  Trust assets, on the other hand, can typically be transferred without delay.

Avoiding probate may also help reduce the administrative burden associated with settling an estate. During probate, executors must file certain documents with the probate court to take inventory of the deceased’s probate assets and to document the distribution of those assets to the rightful beneficiaries.  Additionally, when the deceased owns real estate in more than one state, probate is typically required in each state where property is owned, further complicating matters.

Finally, avoiding probate helps protect privacy.  Probate is public record, and all the documents filed during the process, including the Will and documentation of assets, are public record as a result.  Anyone concerned about privacy may want to consider a living trust, as in most cases the trust document and the distribution of property remain private.

In addition to the post death benefits, living trusts facilitate the management and protection of property in the event of incapacity as well.  If your assets are held in trust and you become incapacitated, your trustee can take immediate control of your property and use it for your care and support – or in whatever way you may have directed in the terms of the trust.

It’s also important to point out what living trusts don’t do. First, living trusts won’t reduce income taxes or estate taxes.  Many living trusts will have provisions to fund an irrevocable trust at the death of the first spouse for estate tax planning purposes, but the living trust itself has no effect on estate taxes.  Due to recent changes in estate tax rules, many of these arrangements need to be reviewed for their efficacy.  We’ll discuss this in greater detail next month.  Furthermore, because you have full control over the assets held in a living trust, they do nothing to protect your assets from creditors, nor help you achieve Medicaid eligibility.

Estate planning is complex and this article barely scratches the surface on living trusts. Hopefully, though, it provides food for thought and a catalyst to further conversations with your estate planning attorney.

Securities and Advisory Services offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary.  The SFA does not provide tax or legal advice. We cannot guarantee future financial results.