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A Complete Guide To Living Trusts And How They Work

Scott Steinberg6-minute read

April 29, 2021

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A living trust may seem like a complex legal instrument designed primarily to help well-off individuals preserve family wealth. But they can also be a helpful tool for real estate planning that everyday families of every size and background can utilize as a way to avoid probate – and ensure that beneficiaries receive certain assets. To learn more about living trusts and how they work with regard to real estate and property holdings, simply read on.

What Is A Living Trust?

A living trust (also known as a revocable trust) is a legal arrangement that allows the owner of a property to transfer ownership to a trust (a legal entity which can contain real estate and other holdings) – and then transfer ownership of this trust to another party while also retaining control of it during their lifetime.

Cemented with a written document that is signed by the individual establishing the trust and witnessed by a notary public, setting up a living trust establishes the legal entity into which a donor (also called a grantor) can transfer assets.

For example: Under the terms of a living trust, a parent can take a house that they own, transfer ownership of it to the trust, and then subsequently transfer it to a child at the moment of the parent’s death or disability.

Noting this, in addition to listing out the property in question, you can also expect the living trust document to also name a trustee (the individual who will administer assets contained within the trust). In addition, it will further specify a beneficiary (the person who will receive the benefits of the trust when the grantor dies).

While effectively allowing a trust maker to retain control of the trust during their lifetime, the living trust allows ownership of the trust to pass to the ultimate recipient – in other words, the beneficiary (the child in the previous example) – upon the death of the grantor.

What Does A Living Trust Do?

There are several reasons to explore setting up and maintaining a living trust for the benefit of those dear to you. Among them are as follows.

Avoid Probate

The most common reason to establish a living trust is to avoid probate, which is the court-supervised process of winding up a deceased individual’s affairs and estate. While probate can tie up loose ends, it’s no secret that it can also be a lengthy, time-consuming, and highly costly process for those involved. Noting this, most grantors turn to a living trust as a means to avoid it and spare their heirs the hassle by avoiding the courts entirely, as property bequeathed under a living trust can transfer to beneficiaries without going through the probate process.

Maintain Privacy

Court records are public, and it’s not uncommon for the process of probate to uncover debts, unpaid balances, sums due to specific individuals, and other details that individuals may wish to keep private. Noting this, if an estate goes through probate, anyone can look up these records and gain access to the information that the grantor and any beneficiaries might prefer to keep private. A living (aka revocable) trust makes it simpler to maintain your privacy by bypassing probate entirely.

Provides Flexibility

It’s not uncommon during the course of an individual’s lifetime for financial or personal situations to change. Bearing this in mind, it’s also relatively common for grantors to wish to change the terms of the trust and retake control over donated assets – a process which can be readily facilitated under a living trust. Put simply, you can change the assets contained within a living trust or even the beneficiaries of the trust whenever you desire to do so during your lifetime.

Provides For Minors Or Dependents With Issues Of Concern

Grantors also enjoy the option to tailor the terms of a revocable trust to make sure that loved ones are provided for. For instance, many grantors may have concerns about adult children that are not adept at managing money or may suffer from addiction or chronic illness. A grantor wishing to place conditions on the use or sale of assets contained within the trust can do so as needed. However, a grantor with minor children or a dependent with a disability must also create a will to appoint a guardian (someone who will look out for these dependents) for their minor children.

Provides For Management Of Assets In Case Of Grantor’s Disability

Having a trustee in place to handle assets also provides the grantor with a layer of protection should they become disabled and unable to handle their own affairs (and the affairs of the trust). If you’re currently well and able but concerned about the future effects of age or declining health, you can also name yourself a trustee, while also specifying the name of a co-trustee or successor trustee in the trust document. Doing so allows you to serve as the trustee for the living trust for as long as you are able and then pass over management of the trust to the successor trustee as situations dictate.

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What Does A Living Trust Not Do?

Of course, as with all legal decisions, there are upsides and downsides to be considered, and limitations to what a living trust can accomplish. Before deciding on the best course of action to achieve your goals, and establishing a revocable trust, you’ll wish to consult with an attorney who specializes in elder law.

Protect Assets From Nursing Home Costs

A revocable trust does not protect assets from being applied to offset nursing home costs when a grantor is applying for Medicaid reimbursement. You’ll wish to consider these potential costs as you age and living conditions shift and be sure to factor them into your financial calculations as you set about planning an estate strategy.

Avoid Estate Taxes

Hoping to save a little money on estate taxes? Unfortunately, it’s a no-go according to the Internal Revenue Service (IRS). So long as a grantor retains control of their assets, these assets will be considered part of their estate upon the grantor’s death.

Help You Save On Legal Costs In The Immediate

You will need to hire an estate attorney to put together the paperwork that’s necessary to help you setup a living trust and then transfer assets into it. Although a worthwhile investment from a long-term perspective, doing so will present you with added expense upfront.

Get You Off The Hook On Making Hard Decisions 

You’ll still have to discuss and decide which beneficiaries will receive which real estate properties and other assets – seldom an enjoyable or comfortable topic. Likewise, you’ll also have to spend time putting together paperwork and documenting assets in detail.

How Does A Living Trust Work?

As above, a living or revocable trust effectively creates a legal entity (think of it as a virtual holding company of sorts) into which you can transfer the ownership of assets before later passing ownership to another party. Control and usage of these assets can also be keyed to follow specified terms and conditions. However, before establishing one, you’ll want to meet with an attorney to discuss if it’s the best strategic vehicle to help you meet your goals.

If you decide that a living trust is called for, the lawyer will help you create the trust, and then transfer assets (for example, homes, condos, apartments, and other real estate investments) from your name into the trust’s ownership. When real estate is involved, this means having to transfer title of the property to the trust. As before, a grantor must also name a trustee to oversee the affairs of the trust and its holdings but can name themselves as the initial trustee if so desired.

How Much Does It Cost To Setup A Revocable Trust?

Costs to setup a revocable or living trust can vary widely depending on your chosen attorney and the geographic area and region in which you are located. In general, it costs more to set up a trust than it does to create a will, but with a will, an estate’s holdings still go through probate. If your estate needs to go through probate, it will incur court costs and related fees such as title transfer and expenses due to record-keeping, which can quickly add up.

What’s The Difference Between A Living Trust And A Will?

A will expresses the wishes of a deceased party with regard to the disposition of their property, whereas a trust executes the grantor’s wishes upon their death. Wills can also be contested and any hearings that are held will be public. Of course, as before, wills are also necessary for those wishing to establish guardianship for dependents. As a general rule of thumb, wills are a vital part of an overall estate plan as there are always items of value (mostly cash) that must still be disposed of after a grantor’s passing.

The Bottom Line: Living Trusts Are An Important Tool For Ensuring That Your Wishes Are Carried Out

Living trusts are a helpful tool for estate planning as they allow you to avoid the cost and hassle associated with probate and ensure that assets are more rapidly and reliably dispensed to their desired beneficiaries. Revocable trusts also offer considerable levels of control over assets contained within them, and considerable flexibility with regard to changing terms, trustees, beneficiaries, and holdings as needed. If you’re interested in learning more about estate planning, you may also wish to learn about what happens to a mortgage after a borrower dies next.

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Scott Steinberg

Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. A strategic adviser to four-star generals and a who’s-who of Fortune 500s, he’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD. The CEO of BIZDEV: The Intl. Association for Business Development and Strategic Planning™, his website is www.AKeynoteSpeaker.com.