This article is for educational purposes only and does not constitute legal advice. For advice regarding your personal situation, please contact an attorney.
Too many people underestimate estate planning because it can be a complicated and unpleasant topic. To maximize your family’s financial well-being, it is still important to determine how your assets will be distributed during your lifetime and beyond. Trusts are powerful tools that are perfect for many people, but not everyone. Consider the strengths and weaknesses of living trusts and how they might fit into your overall financial plan.
How a Living Trust Works
A living trust is a legal agreement that gives one person (called a trustee) control over the assets defined in that agreement. There may be one or more trustees depending on the wishes of the person making the arrangement. The person or entity that creates a trust is called a trustor or grantor. In living trusts, a trustee is often the same person as the donor, but may also be different parties.
Image source: Getty Images.
Trusts can be used in a variety of ways, but are often intended to manage the transfer of assets from a living person to other parties. A trust can be used in estate planning if your plans are too complicated or specific for a will.
Advantages of a Living Trust
Trust funds are popular with people with complicated or extensive assets that they want to pass on to family. Because they are highly customizable as legal documents, they provide flexibility and control for estate planning purposes. While a will or traditional probate process seals the inheritance in a lump sum, a trust can establish structured payouts over time. This is useful for beneficiaries who may receive an inheritance at a young age, which could result in unwanted use of those funds.
Revocable living trusts allow the trustor to change the terms of the agreement. Grantors of revocable trusts have the discretion to add or remove assets from a trust over time. This is ideal for people with different holdings in different asset classes. Beneficiaries may also change over time as needs and relationships change.
In many states, trusts allow assets to pass to heirs without the need for a court probate process. This can reduce the costs of estate administration and allow for a more orderly and discreet process.
Trusts can also be valuable tools if a grantor becomes incapacitated due to illness, accident or old age. By naming a trustee, a trustor ensures that a trustworthy person takes control of those assets. This is extremely valuable for people struggling with long-term care or other similarly expensive needs late in life. Assets in a living trust can be used for the benefit of the donor when necessary, as long as this is specified in the trust agreement, and not just for the benefit of the people to whom the inheritance is due.
Assets held in a revocable trust at the time of an individual’s death generally continue to be subject to estate taxes. However, for US citizens, the first $12.9 million of the inheritance is currently exempt from inheritance tax. This exemption is only $60,000 for non-residents. Therefore, minimizing inheritance tax is often more pressing for non-citizens who invest assets or earn money in the United States
Disadvantages
Some families choose not to use a trust for estate planning because of cost. The cost of creating these legal agreements can vary significantly depending on their complexity, but they are generally more expensive than wills. Additionally, there are typically additional fees for adjustments to revocable trusts or administration fees for assets that require ongoing maintenance. The added flexibility and control isn’t worth a few thousand dollars for many households, especially if they don’t plan on passing on a significant amount of cash to future generations.
In addition to the additional costs, setting up a trust can also present some logistical issues. Some assets can be placed into a trust simply by naming them in the forming documents. However, some assets require coordination with banks, notaries and local governments that recognize title.
Finally, it is important to consider the fact that a trust is designed to allow a person other than the grantor to have some control over assets in certain circumstances. Of course, the donors can retain control by taking on the role of trustee, but the original asset holder sacrifices some authority by involving another party.
Source : www.fool.com