Creating estate plans can seem overwhelming. Should you create a will or a trust? Should it be an irrevocable or revocable trust? And what exactly is a living trust? Do you need to designate someone as your power of attorney?
There are many ways to design an estate plan, but understanding what these documents do makes your decision much easier. Here is what you need to know about a living trust.
What is a living trust?
You wonder what separates a living trust from a will. Put simply, a living trust goes into effect while you are still living. As soon as you fund a trust, it becomes a living and enforceable document. Wills do not take effect until after you have passed on.
A living trust can be revocable or irrevocable. A revocable trust allows you to control the trust while you are still around. You can make changes to the assets in the trust, as well as who is named as a beneficiary. However, your assets remain vulnerable to creditors.
An irrevocable trust does not allow you to change it after you have signed off. After it is funded, whoever you named the trustee has legal ownership over the trust.
Here are some of the benefits of a living trust.
May reduce taxes
An irrevocable trust allows you to reduce taxable income because you no longer own the property in the trust. For married couples, it can also cut your estate taxes. According to Forbes, a properly drafted trust can save a Massachusetts couple about $100,000 in estate taxes after the second spouse passes.
Guards assets for children
If you have minor children, a trust can hold money for them until they reach a certain age. You can also stipulate money be paid out in increments. Your adult children may also be less than stellar at managing finances. With a trust, you can designate their money be dispersed yearly, quarterly or on an as needed basis.
Protects your assets if you become incapacitated
Perhaps you are single and have no children. You worry who will take care of you, if you become incapacitated. A trustee will manage your assets and ensure you receive the care needed.
A trust does not go through probate because the assets in the trust no longer belong to you. With a will, your estate must pass through probate to transfer property in your name over to your beneficiaries.
Keeps your finances private
Since a trust does not pass through probate, it does not become a part of the public record. The value of your estate and everything included in it remains private.
A living trust may not work for everyone. However, if you are concerned about estate taxes, keeping your finances private or protecting your assets for your children, it may be the right estate planning tool for you.