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Living trust documentsWhile no one wants to think about his or her own death, planning for the inevitable is an important part of protecting your assets and those you love. There are a few important legal steps you can take to prepare for the future of your estate, one of which may include the creation of a living trust. Here’s a look at what a living trust is, what sort of protections it offers to you and your loved ones and whether or not it needs to be part of your unique estate plan. 

If you decide you want estate planning help, SmartAsset’s free matching tool can help you find a financial advisor.

What Is a Living Trust?

A living trust is a legal document that makes it easier for you to pass along property, accounts and other assets to your loved ones after you die. It allows your assets to pass along directly to your designated beneficiaries without needing to go through the courts, eliminating the costly and lengthy probate process.

Once created, your living trust will essentially own the assets you choose to place within it. This may include things like:

  • Bank accounts
  • Investments
  • Real estate
  • Vehicles
  • Jewelry
  • Other valuable personal property

The living trust will be managed by a designated trustee (which can be you) while you’re still living; you may also choose to have your spouse added as a co-trustee. Additionally, you will name a successor trustee as your representative, who will manage the trust and distribute its assets after you pass away.

Even though the living trust holds these assets, you are still considered in possession of them while you’re alive (assuming that you named yourself the trustee). This means that you can move assets in and out of the trust as you see fit, and if you have a revocable trust, you can even cancel or change it at any time.

Why a Living Trust Is Helpful for Real Estate

Beautiful house at duskWhether you own one property or 10, establishing a living trust can simplify the inheritance process for your loved ones when you pass away. Any property you own is subject to the probate process when you die. Unlike a life insurance policy or payable on death (POD) bank account, real estate cannot be directly passed on to a named beneficiary. It will instead be lumped in as part of your overall estate.

That estate will then go to the probate courts.

Probate can be a very lengthy process. While waiting, your loved ones may be unable to manage, utilize or even sell the property that you left behind.

Until probate is complete, your executor will be responsible for maintaining the property, including paying taxes, making necessary repairs and covering bills like insurance. Making changes to the property or even renting it out during probate may require permission from the courts.

Depending on the total value of your estate and whether any debts are owed (including mortgages) at the time of your death, the probate process can result in financial loss for your loved ones if properties are simply sitting stagnant. Putting those properties in a living trust instead allows you to pass them on to loved ones directly and right away.

This might mean giving your home to an adult child who already lives with you, so that they may remain in place after your death. It might also mean passing rental property on to your heirs so that they may immediately manage the homes as they see fit.

Benefits of a Living Trust for Real Estate

A living trust is a beneficial financial product for many reasons.

It bypasses the probate courts. There are certain assets that will pass on to your beneficiaries directly. These include life insurance proceeds, POD bank accounts and retirement accounts like IRAs or employer-sponsored 401(k)s. Other assets will need to clear the probate courts before they can be disbursed to your beneficiaries, however. This probate process can take months or even years and can be both costly and complex.

You retain control of your estate … even after you pass away. A living trust allows you to set rules, timelines and stipulations for your estate, if desired. Say you don’t want your children receiving a life-changing sum of money in their early 20s; with a living trust, you can designate when your kids receive that inheritance and even dole it out in stages.

It’s private. Unlike a will, your trust can be kept as private as you’d like. Once you pass away and your will is filed with the probate court, it becomes public record; if you would rather your estate and your wishes be kept out of the public eye, a trust can help you do so. And because a trust skips the probate process, it’s also much more difficult for someone to challenge your directives.

How a Living Trust Differs from a Will

Both a living trust and a will allow you to dictate how your estate is distributed after you’re gone. However, there are some important differences between the two.

  • A living trust is considered “in effect” even while the grantor is still alive. A will, however, only goes into effect after the grantor passes away. 
  • A will goes through the probate courts, while a living trust skips the probate process altogether.
  • During probate, your will is filed as public record. Your living trust and its contents, however, can be kept entirely private.
  • Any assets without a named beneficiary (such as a life insurance policy) will pass through probate, even if you have a will. This process can take months or years, while your loved ones wait to receive their share of your estate. With a living trust, however, assets can be passed down immediately.
  • Creating a will can be a cheap – or even free – process. Establishing a trust, however, is a bit more complex and can cost hundreds or even thousands of dollars.
  • You can make requests and name stipulations in your will. However, your heirs don’t necessarily have to follow them after you’re gone (depending on the conditions and even your state). With a trust, you can dictate how and when assets are disbursed.  You’ll also have a trustee around to manage the process.

The Bottom Line

Father walks with his sonThough a bit more complex and costly than a will, a living trust can be a valuable financial tool for individuals of any net worth who have real estate assets to pass along. A living trust allows your estate to pass on to your loved ones without going through the probate courts. With this trust you can stipulate exactly where your assets go and even when they are disbursed. You can designate yourself as the trustee while you’re alive and name a successor trustee who will take over once you die.

Tips for Estate Planning

  • If you’re wondering how to create an estate plan or how to adjust it, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • No matter what age you are, start thinking about retirement now. Use SmartAsset’s free retirement calculator to see how much money you’ll need to retire, and if you have access to a workplace retirement plan like a 401(k) make sure you take advantage.

Photo credit: ©iStock.com/DNY59, ©iStock.com/chandlerphoto, ©iStock.com/kieferpix

Stephanie Colestock
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