A living trust is a popular consideration in many estate strategy conversations, but its appropriateness will depend upon your individual needs and objectives.
What is a Living Trust?
A living trust is created while you are alive and funded with the assets you choose to transfer into it. The trustee (typically, you) has full power to manage these assets. But using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
A living trust will also designate a beneficiary, or beneficiaries, much like a will, to whom the assets are structured to automatically pass upon your death.
If you create a revocable living trust, you may change the terms of the trust, the trustee, and the beneficiaries at any time. You can also terminate the trust altogether.
Why Create a Living Trust?
The living trust offers a number of potential benefits, including:
- Avoid Probate – Assets in a living trust are designed to transfer outside the probate process, typically resulting in a faster and more private distribution process compared to a will.
- Manage Your Affairs – A living trust can be a mechanism for caring for you and your property in the event of your physical or mental incapacity, provided that you have adequately funded it and named a trustworthy trustee or alternative trustee.
- Ease and Simplicity – It is generally a simple matter for a qualified lawyer to create a living trust tailored to your specific objectives. Should circumstances change, it is also possible to change the trust’s provisions.
- Avoid Will Contests – Assets passing via a living trust may be less susceptible to the sort of challenge you might see with a will, though challenges are still possible.
The Drawbacks of a Living Trust
Living trusts are not a panacea for estate planning. They won’t accomplish some potentially important objectives, including:
- A living trust is not designed to protect assets from creditors. It is also considered a “countable resource” when determining your Medicaid eligibility.
- There is a cost associated with setting up a revocable living trust.
- Not all assets are easily transferred to a living trust. For example, if you transfer ownership of a car, you may have difficulty obtaining insurance, since you are no longer the owner. Retirement accounts like IRAs or 401(k)s generally cannot be owned by a living trust without triggering unintended tax consequences; instead, you may name the trust as a beneficiary if appropriate.
- A living trust is not a mechanism to save on taxes, now or at your death.
Conclusion
A living trust can be a valuable tool in an estate strategy, offering benefits such as probate avoidance, disability planning, and greater privacy. However, it’s not a one-size-fits-all solution. Its usefulness depends on your unique financial situation, goals, and the types of assets you hold. Understanding both the advantages and limitations is key. At SHJ Wealth Advisors, we recognize that estate planning is a key component of the broader financial planning process. Our team can help evaluate whether a living trust aligns with your overall strategy. Please reach out to Info@shjwealthadvisors.com if you would like to find a time to meet with one of our CFP® Professionals and thanks for reading!
Disclosures:
The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.
