Unlike a will, a living trust does not go through probate, which can save time and reduce legal costs. This can help streamline the process of distributing assets to designated beneficiaries without delays or expenses. To use a living trust effectively as part of your estate plan you will need to understand how it works. A financial advisor can help you set up a trust and make sure that it is compliant with legal requirements.
How a Living Trust Works
A living trust is a legal arrangement that allows you to manage assets during your lifetime and transfer them to beneficiaries upon death.
The person who creates the trust, known as the grantor, transfers ownership of their assets into the trust and appoints a trustee to manage them. This trustee can be the grantor themselves or another trusted individual or institution.
A major benefit of a living trust is the option to maintain control over your assets while you are alive. This would allow you to make changes or revoke the trust as your circumstances change. Then, after your passing, assets in the trust will be distributed according to the specific instructions outlined in the trust document.
How a Living Trust Can Avoid Probate
A trust bypasses probate because of its legal structure. When the grantor passes away, assets within the trust are directly transferred to the named beneficiaries by the successor trustee, avoiding the probate process. This approach not only conserves time and expenses but also keeps the estate’s details private, as the trust’s provisions aren’t part of public records, unlike a will.
A living trust can be beneficial when you have complex family relationships, or when the estate has many properties across multiple states, as it can streamline the distribution of assets held in the trust and avoid several probate proceedings.
However, to fully bypass probate, you must transfer all intended assets to the trust. Any assets not included in the trust will still be subject to probate.
How to Create a Living Trust
Here is an overview of the typical process for establishing a living trust:
- Choose which assets to include. The process of creating a living trust begins with you deciding which assets you want to include in the trust. This can range from real estate and bank accounts to investments and personal property.
- Gather documentation. Once you’ve identified these assets you would like to include, you’ll need to gather the necessary documentation, such as property deeds and account statements, so that you can move them into the trust.
- Select a trustee. Establishing a living trust involves choosing a trustee to manage its assets as outlined by your instructions in the trust document. Individuals often appoint themselves as the initial trustee to retain control during their lifetime. It’s important to designate a successor trustee to assume responsibility upon your death or in the case of incapacity. This successor should be someone reliable, such as a family member, close friend, or professional fiduciary whom you deem fit to oversee asset distribution according to the trust’s terms.
- Draft and sign the trust document. To formalize your living trust, you’ll need to draft the trust document and sign it in the presence of a notary public. This document outlines the terms of the trust, including the beneficiaries and the distribution plan for your assets.
- Fund the trust. Once the trust is established, it’s important to transfer ownership of your assets into the trust’s name. This process, known as funding the trust, is important so that your assets are managed and distributed according to the instructions that you outline for the trust.
Bottom Line
A living trust allows an estate to avoid probate, offering a streamlined way to manage and distribute assets after death. By transferring ownership of assets into a living trust, individuals can help their beneficiaries receive inheritance without the delays and costs associated with the probate process. This not only provides peace of mind but also maintains privacy, as the details of the trust do not become part of the public record.
Estate Planning Tips
- A financial advisor can help you create an estate plan to manage and distribute your assets. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While it may be tempting to save some money and plan your estate by yourself, you should still be careful with these DIY estate planning pitfalls.
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