Many people who are planning their estate hear about living trusts. Here are answers to some of the most often asked questions about these popular and valuable estate planning tools.
Q. What is a living trust?
A. It is a legal arrangement whereby a person transfers property from their name to the name of the living trust, and the property in the trust is then controlled by a trustee. Most people who set up a trust name themselves as trustee. The trustee holds and manages the property for your benefit, or of other people you select, called beneficiaries. When you die, a successor trustee (someone you have named) takes control of the trust and distributes the property in accordance with instructions in the trust document.
A living trust can be revocable, meaning you have the right to modify, amend or terminate it, or it can be irrevocable, meaning that once you set it up, you cannot change or terminate it.
Q. How does a living trust avoid probate?
A. When the successor trustee takes over management and control of the trust upon your death and distributes the trust property, this occurs without the involvement of the probate court. So with a living trust, property can often be transferred after death much faster than by will, since property left by a will has to go through the probate process. Also, the steps to be taken under a living trust can be less expensive than administering a will.
Q. How flexible is a revocable living trust?
A. Very. While you are alive you can put property or money into it, take out money or property you choose, change its terms, choose and change the trustee, and even revoke it altogether. You keep a lot of control over the assets in the trust as well as who will be the beneficiaries.
Q. Why does it matter whether I have a revocable or irrevocable trust?
A. With an irrevocable living trust, you can reduce taxes as well as avoid probate. Property put in an irrevocable trust is no longer yours. The property is not counted for estate tax purposes, and you don't pay income tax on interest earned by the property unless it is paid to you.
Q. How can a living trust help keep my estate plans private?
A. Living trusts offer a lot more privacy than wills because wills must be proved and administered through courts, and court records are open to the public. The contents of a living trust don’t have to be made public, so they are easier to keep confidential.
Q. Can my living trust be challenged by my heirs ?
A. Living trusts are usually harder to challenge than wills. This is because more effort and thought typically go into preparing a living trust than a will, so it is harder for someone to show that you were pressured to create the trust or were mentally incompetent when you made it.
Q. Are there other benefits to having a living trust?
A. Another key benefit of a living trust is that it can help you in the event you ever become incapacitated. For example, suppose you become incapacitated due to Alzheimer's disease or another serious illness. If your assets are not in a trust, a conservator (called a "guardian" in some states) will have to be appointed by a court to take care of your assets. A conservatorship proceeding can be expensive and time consuming as well as cause agonizing family disputes. If you have created a living trust, the successor trustee (someone you have selected) can take control of the trust assets and use the income (or sell assets if needed) to provide for your care.
Q. If I have a living trust, do I still need a will?
A. A trust doesn’t totally eliminate the need for a will, particularly for assets you don’t put in the trust. But since your major assets will pass by a trust, the probate for a will should be much faster and easier.
Q. How is a living trust created?
A. A living trust is created by a written trust document, usually written with a lawyer’s help. Your lawyer can also help prepare other papers used to transfer property into the trust.
Q. What property can I put in the living trust?
A. You can place almost any type of property in it, including money, your home and other real estate, stocks, bonds, artwork, collections and automobiles. Placing property in a living trust usually does not result in an assessment of taxes.
Q. Who should be the trustee of my trust?
A. Most people serve as the trustee of their own trust until they die or become incapacitated. When this happens, the successor trustee will take over management and control of your trust. Because the successor trustee (or the original trustee if you decide not to serve as the trustee of your own trust) will have control over your property and assets, he or she should be someone you completely trust and who is experienced with financial matters. Many people choose a family member or close friend to serve as trustee, but you can also select a professional trustee, like a bank or trust company.
Q. Can I prepare my own living trust or use a living trust service?
A. A living trust is an important legal document, which must comply with legal rules in order to be valid. Also, some companies that make sales pitches about living trusts on television, radio or over the Internet may use pre-printed forms that do not fit your situation. There are some people for whom a living trust is not a good choice. Problems may not surface until after you die, when it is too late. Almost always it is beneficial, and often critical, to have your own lawyer advise you whether a living trust is a good choice for you, and prepare your living trust document with your particular wants and needs in mind.
These are some of the most commonly asked questions about living trusts. If you have questions about living trusts or other estate planning tools, please call us. We will be happy to answer them.
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