The creation of a thorough estate plan commonly involves incorporating numerous different strategies and tools into one overall plan. One tool that has gained in popularity over the past several decades is the living trust. Although trusts were once used primarily by wealthy families as a way to pass down the family wealth to the next generation, trusts are now used by the average person to accomplish a broad spectrum of goals and objectives. By understanding a bit more about living trusts you can decide if a trust would be a beneficial addition to your estate plan.
A trust can be revocable or irrevocable. An irrevocable trust cannot be changed by the maker once it becomes effective while a revocable trust can be changed or terminated at any time and for any reason. In addition, a trust can be a testamentary trust or a living trust (inter vivos in legal terminology). A testamentary trust is one that doesn’t become effective until the death of the maker while a living trust becomes effective when all of the formalities of creation have taken place and the trust has been funded.
A living trust can accomplish a wide variety of estate planning goals including probate avoidance, tax avoidance, and incapacity planning. Assets transferred into an irrevocable trust, for example, are no longer owned by you, meaning they are not included in the probate of your estate and are not counted when calculating gift and estate taxes due on your estate.
A living trust also allows you to retain control over the assets used to fund the trust to some extent. When you gift an asset directly to a loved one you have no control over how that asset is used from that point onward. When you utilize a living trust to make gifts, on the other hand, you have the ability to use the trust terms to control how and when the assets are distributed as well as what they can be used for if you choose.
Yet another advantage to creating a living trust comes in the form of incapacity planning. By creating a revocable living trust you have the ability to transfer assets into the trust and name yourself as the trustee. You can then name a spouse, adult child, parent, or other person as the successor trustee. In the event of your incapacity the successor trustee automatically takes over. This gives a loved one immediate control over assets in the event of your incapacity instead of your loved one having to go through a court to acquire that control. You may even be able to include your own definition of “incapacity” within the trust. Because the trust is revocable you can modify or terminate the trust at any time.
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