What Is A Living Trust?

The Extensive Guide To Living Trust Benefits

What is a Living Trust?

A living trust, also known as a revocable living trust, is one of the best methods for passing your money, property, and assets to your loved ones after you pass away while avoiding the long, stressful, and expensive probate court process. It is one of the most popular estate planning documents because of the combination of flexibility and protection it provides. With a living trust you can:

  • Efficiently pass your money and property to the next generation
  • Avoid the long, stressful, and expensive probate court process
  • Keep your finances and the transfer of your assets private
  • Maintain control of your finances after you pass away
  • Protect your family and assets in case you become incapacitated
  • Name someone you trust to distribute your assets after you pass away
  • Change or revoke the document at any point during your lifetime.
what-is-a-living-trust

Think of your living trust as the backbone of your estate plan. Usually it is drafted as a substitute to a last will and testament. That’s because it provides more robust protection and benefits for the drafter and their family such as probate avoidance, added privacy, and incapacity planning.

What This Guide To Living Trust Will Cover

The information in this guide is based on over a decade worth of experience advising and drafting estate plans for 1,000s of clients. If you are considering drafting a living trust, or any other type of estate planning document, this guide is for you. Revocable living trusts have grown in popularity vs other estate planning tools due to the combination of flexibility and protection they provide from long and expensive court processes like probate and guardianship actions. In this guide you will learn the answers to questions like:

  • Who needs a living trust?
  • How does a living trust work?
  • Who are the key parties named in a living trust?
  • What are the benefits of a living trust?
  • What is the difference between a will and a living trust?
  • What is the difference between an irrevocable vs revocable living trust?
  • How do you set up a living trust?
  • What assets should you put into a living trust?
  • Which assets should not be included in a living trust?

What This Living Trust Guide Will Not Cover

There are many different types of trusts that achieve different estate planning goals. For example: irrevocable trusts, special needs trusts, asset protection trusts, medicaid trusts, pet trusts, charitable remainder trusts, and life insurance trusts to name a few. However, the primary focus of this guide is on the revocable living trust and its benefits.

Who Needs a Living Trust?

If you fall into any of the following categories, you should consider a living trust:

  • Have children or grandchildren
  • Own a house or real estate
  • Own a business
  • Have assets in investments, bank accounts, or retirement plans
  • Married, but haven’t estate planned since your wedding
  • Divorced, but haven’t estate planned since the divorce
  • Have precious family heirlooms

How Does a Living Trust Work?

When you make a living trust, you are known as the settlor/grantor and you assign yourself as the trustee. When setting up the trust, you transfer your assets from your name into the name of the trust. This is commonly known as funding the trust. This is an essential step because it is what allows your assets to transfer seamlessly to your family members so that they can avoid probate court after you pass away.

Because you are both the settlor and trustee, you will manage the trust and all of the assets just like you do now. This means that if you want to add or remove an asset or beneficiary, you can do so at any time.

Some of the most important people you will name in the trust are your beneficiaries. Your beneficiaries are the people you choose to inherit your money and property after you pass away. Typically, this is a spouse, children, grandchildren etc. You can also designate how much each beneficiary will get and stipulate when they should receive their inheritance.

Lastly, you will name your successor trustee. This person will take over management of your trust if you become incapacitated or die. They will also be responsible for settling your estate and distributing your assets to your beneficiaries according to your wishes after you pass away.

This distribution of assets will take place privately instead of having to go through the public probate court process. This allows your family to receive your assets in a matter of days or weeks after your passing instead of months, or potentially years, if they were to have to go through probate. Probate avoidance is one of the major benefits of a living trust.

In the next section we will talk about additional benefits of a living trust and the estate planning goals they can help you achieve.

The 5 Major Estate Planning Goals
And The Benefits A Living Trust Can Help You Achieve

What are The Benefits of a Living Trust?

Before creating a living trust, you should clearly define your personal estate planning goals. Having clearly defined goals will help in your discussions with an experienced trust attorney about what estate planning documents will be best for your unique situation. If your goals are more extensive than what a living trust is able to provide, the attorney can advise you on supplemental documents so that your estate plan provides you and your family with adequate protection. But what if you have never estate planned before? Where do you start and what goals should you have? In this section, we will cover the 5 major estate planning goals and the benefits a living trust can help you achieve. 

Goal #1: Financial Planning

Maintain control of your finances after you pass away so you can have peace of mind that your family is financially stable and protected

Benefits of a Living Trust:

  • Maintain control of your finances after you pass away so you can have peace of mind that your family is financially stable and protected
  • Appoint someone responsible that you trust to manage your money, property, and assets and distribute them to your loved ones according to your wishes
  • Ensure that your family receives your money as fast as possible so that they have the ability to survive and pay for critical expenses like mortgage payments, medical expenses, funeral expenses, and outstanding debts

Goal #2: Probate Avoidance and Inheritance Planning

Pass your assets to your family in the most efficient way possible to avoid long, expensive, and stressful battles in probate court

Benefits of a Living Trust:

  • Privately pass your assets to your family and avoid long, expensive, and stressful battles in probate court
  • Specifically document who you want to receive your assets to prevent your family from fighting over your money and tearing itself apart after you pass away
  • Have your assets distributed to your loved ones quickly and privately to prevent dishonest family members and creditors from coming after your money

Goal #3: Wealth and Legacy Planning

Protect your family’s wealth and legacy for your future generations

Benefits of a Living Trust:

  • Preserve your family’s wealth and legacy for future generations by avoiding estate taxes
  • Protect your life’s work and keep your family’s legacy in tact by making sure your wealth and precious heirlooms remain in your family

Goal #4: Child Protection Planning

Make sure your children are taken care of emotionally and financially so that they can live a healthy life and achieve their dreams, even if you’re not here to guide them

Benefits of a Living Trust: 

  • Help your kids achieve their dreams like going to college or buying a home by providing for them financially, even if you aren’t alive to lend a guiding hand yourself
  • Make sure that your kids reach a mature enough age or achieve a significant milestone like graduating college before receiving the responsibility of managing your lifetime accumulation of assets in the form of an inheritance
  • Protect your children and your money in case they have future problems with abusive spouses, creditors, drugs, alcohol, gambling, handling money or if they have special needs and require benefits

Goal #5: Incapacity Planning

Protect yourself and your family by appointing someone you trust to manage your assets on your behalf if you are incapacitated and can’t communicate

Benefits of a Living Trust:

  • Appoint a successor trustee who can step in to manage your money, property, and assets on your behalf in the event you become incapacitated and can’t manage them yourself
  • Ensure that all of your financial and medical decisions will be taken care of in case you are no longer able to communicate by pairing your living trust with a financial power of attorney, medical power of attorney, and living will. This will ensure all of your financial and medical decisions will be taken care of in case you are no longer able to communicate. 

Now that you have a better understanding of common estate planning goals and how the benefits of a living trust can help you achieve them, we will compare a living trust vs will.

Trust vs Will

What is the Difference Between a Will and a Living Trust?

If you are debating between a living trust vs will, don’t worry, you are not the only person. These are two of the most common documents people use as the cornerstone of their estate plan. While these documents have similarities, they also have a wide variety of differences that could potentially impact how your family receives your assets and whether or not you will have protection in place if you were to become incapacitated. In this section, we will compare a will vs trust and discuss the advantages of a living trust.

What is a Last Will and Testament?

A last will and testament, commonly referred to as a will, is one of the most well known estate planning documents. Having a will in place prior to your death allows you to:

  • Name who should receive your money and property after you die
  • Specify how much of your estate each of your heirs should receive
  • Name a guardian for any children under the age of 18 along with a conservator to manage any assets you leave behind
  • Appoint someone you trust to act as your personal representative to settle your estate and distribute your assets to your loved ones after you die

What Happens if You Die Without a Will?

If you do not have a will in place when you pass away, your estate will be subject to the state’s intestacy laws. This means that the court will determine who gets your money and property according to state law with no input from you. This situation could be less than ideal, especially if you have other people that you need to provide for after you pass. At a minimum, you should have a will in place to make sure the right people receive your assets. However, a last will and testament does have significant drawbacks when compared to a living trust.

Advantages of A Living Trust vs Will

Avoid Probate Court

One of the major advantages of a living trust over a last will and testament is that a living trust avoids probate court, but a will does not. In fact, a will is actually your ticket to probate. That is because a will must go through probate before your money and property can be distributed to your family members.

Because probate is public, the contents of your will are made public. This can increase the likelihood that someone can contest your will. In general, probate is a long, stressful, and expensive process, especially if your will is contested. This can delay your family from receiving your assets for months, even years. In general, probate can be difficult to endure during a time of mourning.

A living trust, on the other hand, allows your family to avoid the probate court process. The transfer of your assets takes place privately and can occur within days or weeks after your death instead of months or years. Additionally, only the individuals named in the trust have a right to know what the trust contains. This makes it much less likely that a greedy family member will contest the trust. Overall, a living trust is the fastest and most effective way to make sure your family receives your assets.

Planning for Incapacity

Unlike a last will and testament, a living trust allows you to plan for incapacity. That’s because a living trust comes into effect the moment it is signed and funded. A will on the other hand only takes effect after you die. It is very common for people to become incapacitated before they die. When most people think about estate planning, they only think about planning for death. But comprehensive estate planning also plans for situations where you may not be able to make your own financial and medical decisions. A living trust helps you with this because you will name a successor trustee. If you die or become incapacitated, your successor trustee will step in to make sure that your assets are being managed properly. As a result, you want to pick someone you trust who can handle this large responsibility.

Maintain Control of Your Finances

Some people wish to maintain control over their finances after they pass away. An advantage of a living trust is that it allows you to do so. In some circumstances, people are planning for a family member with special needs, so they need to control what happens to their finances after they die to avoid disqualifying their loved one from benefits. In other circumstances, they may have young children and want them to achieve a milestone such as graduating college or reaching a certain age before they receive a large inheritance. There are a variety of reasons people wish to control their finances after they die. A living trust can help you with this.

Maintain Your Privacy

As we stated earlier, a living trust avoids probate court. Probate court is a public process. As a result, when your will goes through probate, its contents become public. For a lot of people, this is less than ideal for a variety of reasons. An advantage of a living trust is that the transfer of your assets happens in private and only the people named in the trust have a right to see its contents. If you want to maintain your privacy, a living trust may be a good option for you.

Avoid Estate Taxes

Depending on the size of your estate, estate taxes may be a concern. A living trust can help you minimize these taxes so that you can preserve the value of your estate when passing it on to your loved ones. Also, it avoids having to pay the hefty “inventory fees” that the probate court assesses on your post-death assets.

In general, a living trust is a much more robust estate planning document that provides you, your family, and your assets more protection than a last will and testament.

Irrevocable vs Revocable Living Trust

What is the Difference Between an Irrevocable vs Revocable Living Trust?

Flexibility

A living trust is revocable, which means it can be changed, dissolved, or “revoked” at any time in the future. People find this useful because they can make a change if their circumstances change in the future. For example, if you would like to add or remove assets or beneficiaries from your living trust after it has been created, you can do so no problem.

An irrevocable trust, on the other hand, is more permanent than a revocable trust because it can’t be changed after it is created. Typically, you give up control of your assets by placing them in the name of the trust and assigning a third party trustee to manage the assets. These types of trusts are very complex and they are only used in very specific situations, usually to avoid creditors or taxes.

Examples of Irrevocable Trusts

 Special Needs Trust – a special needs trust is a type of irrevocable trust that is created to protect the government benefits of a special needs family member like SSI, Medicaid, subsidized housing, and vocational rehab. Oftentimes, parents wish to leave behind an inheritance to supplement these government benefits to make sure their child has a comfortable life after the parents pass away. However, if an inheritance is given directly to the child, it could count as income and jeopardize the child’s ability to get much needed government assistance. In order to avoid this, a special type of irrevocable trust is structured to keep the child’s eligibility for government assistance intact.

Asset Protection Trust – another type of popular irrevocable trust is an asset protection trust. These types of trusts are usually created by individuals with a substantial amount of wealth who are potential targets of lawsuits. For example, doctors who may be subject to malpractice claims, business owners, executives, high profile individuals like entertainers or celebrities, officers and directors of banks, and general partners in real estate deals. The way these irrevocable trusts are structured allows these individuals to protect their assets from creditors and lawsuits.

While these aren’t the only two types of irrevocable trusts, they are some of the most common. In most cases, a revocable living trust will be the right estate planning tool for you and your family. However, if you believe you need an irrevocable trust, it is best to consult with an experienced trust attorney. Irrevocable trusts are very complex and they can’t be changed after they are created. As a result, you need to make sure the trust is structured properly in order for it to work according to plan without losing access to your assets.

The Simple 6 Step Process to Set Up a Living Trust

How Do You Set Up a Living Trust?

Step 1: Define Your Estate Planning Goals

The first step to creating a living trust is to define your estate planning goals. Everyone’s family and asset portfolio is unique, which means that everyone’s estate plan will be different depending on what you have to protect and what you are trying to accomplish.

There is no “one-size-fits-all” estate planning document. Instead, there are a variety of different documents that accomplish different goals. When combined together, they create a robust estate plan. This is why it is so useful to use an attorney throughout the estate planning process. An experienced trust attorney can align your goals with the proper estate planning documents to give you and your family the protection you need.

If you need help developing your estate planning goals, reference the earlier part of this guide that defined 5 common estate planning goals and the benefits a living trust can help you achieve.

Step 2: Make a List of All of Your Assets

One of the biggest benefits of a revocable living trust is that it helps your family avoid the long, stressful, and expensive probate court process. In order for your assets to be protected, they need to be placed in your trust. Placing your assets in your trust is known as “funding the trust”. As a result, you should make a list of all the assets you want to protect and pass on to your loved ones after your death. Having your asset portfolio readily available will help your trust attorney give you the best possible advice when estate planning.

Step 3: Collect the Ownership Paperwork for Your Assets

Once you have made a list of your assets, you will need to collect their ownership paperwork in order to fund the trust. When you fund your trust, you will re-title your assets into the name of the trust. You need to make sure the funding of the trust is done properly or else the assets will not be properly protected. If you are unsure of what documents to include in your living trust, we will talk about this in the next section of the guide.

Step 4: Select Your Beneficiaries

Your beneficiaries are the people you name in your trust who will inherit your assets after you pass away. This is usually the spouse, children, or grandchildren, but doesn’t necessarily have to be. A common objective most people are trying to achieve when they draft a living trust is to pass their assets to their loved ones in the most efficient way possible. Prior to drafting your trust, it’s important to have a clear picture of who you want, and who you don’t want, receiving your money, property, and assets after you die to ensure your trust document is drafted accordingly.

Step 5: Choose Your Successor Trustee

Another major benefit of a living trust is that you can name someone you trust to act as your successor trustee. This person will be responsible for distributing your assets to your loved ones according to your wishes after you pass away. Additionally, they will step in to manage your assets in the event that you become incapacitated and can’t manage them yourself. Acting as successor trustee is a lot of work and it is incredibly important to name someone that can handle these significant responsibilities. After all, they will be responsible for ensuring that your trust acts the way you intended.

Step 6: Consult With an Experienced Trust Attorney

The final step in the process is to schedule a consultation with a trust attorney. A living trust is one of the most important documents you will draft in your lifetime. You worked your entire life to accumulate your wealth, and this document will be responsible for ensuring that wealth is protected and transfers as efficiently as possible to your future generations. As a result, you need to make sure your living trust is drafted properly and is legally binding. Trust law changes from state to state. For example, something that is valid in Ohio may not be valid for a living trust in Michigan or a living trust in Florida. The best way to make sure your trust is legally binding is to consult with an experienced trust attorney in your state who focuses their practice on will, trust, and estate law. 

What Assets Should You Put into a Living Trust?

Usually it’s best to include real estate, stocks, CDs, bank accounts, investments, insurance and other assets with titles. Some people also include jewelry, clothes, art, furniture, or other assets in a one page assignment.

Which Assets Should not be Included in a Living Trust?

There are certain circumstances when assets shouldn’t be put into your trust due to potential tax ramifications. For example, retirement accounts like 401k, 403(b), IRAs, and qualified annuities often should be left out because of certain tax ramifications that may arise. You should consult with an attorney before making the decision to fund.

What Happens When You Die With a Living Trust?

If you pass away with a living trust, it will be up to your successor trustee to settle your estate and distribute your assets to your loved ones according to your wishes. Here is a brief list on what what your successor trustee will need to do in order to settle your estate:

  • Contact the settlor/grantor’s family to notify them of your role as successor trustee
  • Identify and help execute any funeral instructions
  • Review the trust and inventory the assets
  • Notify institutions of the settlor/grantor’s death
  • Assemble a team of professionals to help settle the estate
  • Pay any outstanding bills and taxes
  • Distribute assets to the beneficiaries of the trust

If you would like to learn more about what your successor trustee needs to do in order to administer your trust after you pass away, please reference this article we wrote called The Responsibilities of a Trustee which covers the topic much deeper.

Conclusion

A living trust is one of the best and most popular estate planning documents because of the combination of flexibility and protection it provides. If you wish to achieve any of the following, a living trust may be the right option for you:

  • Efficiently pass your money and property to the next generation
  • Avoid the long, stressful, and expensive probate court process
  • Keep your finances and the transfer of your assets private
  • Maintain control of your finances after you pass away
  • Protect your family and assets in case you become incapacitated
  • Name someone you trust to distribute your assets after you pass away

Your living trust will be the backbone of your estate plan, so it’s best to work with an experienced trust attorney to make sure it is drafted properly. Prior to meeting with an attorney, make sure you have a clear picture of your goals, make a list of all of your assets, select your beneficiaries, and select a successor trustee that can handle the responsibilities associated with executing your trust after you pass away. If you are interested in drafting a living trust and would like to speak with an experienced trust attorney, please call us today at Rochester Law Center at 248-613-0007. Over the past decade, we’ve helped 1,000s of families estate plan.

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Written By Chris Atallah - Founder, Rochester Law Center, PLLC
special-needs-trust-attorney
Written By Chris Atallah - Founder, Rochester Law Center, PLLC

Chris Atallah is a licensed Michigan Attorney and the author of “The Ultimate Guide to Wills & Trusts – Estate Planning for Michigan Families”. Over that past decade, Chris has helped 1,000s of Michigan families and businesses secure their futures in all matters of Wills, Trusts, and Estate Planning. He has taught dozens of seminars across the State of Michigan on such topics as avoiding the death tax, protecting minor children after the parents’ death, and preserving family wealth from the courts and accidental disinheritance. If you have any questions, Chris would be happy to answer them for you – just call at 248-613-0007.