Living trusts, also called inter vivos trusts, are property arrangements that individuals create while they are alive to benefit their heirs after their death. The person who establishes the trust to transfer ownership of his assets to it can choose from several types.
The most common advantage of a living trust is the ability to pass on as much property as possible to beneficiaries. Since setting up a living trust is often so simple that no attorney or special professional assistance is required, an added benefit is the ease of creating one.
An estate left to heirs via a will goes through probate to settle outstanding debts before the remaining property is distributed to beneficiaries. Not only is probate a lengthy process that can take months or years, but it's also costly because probate court fees in some states and attorney fees are calculated as a percentage of the overall net worth of the deceased's estate.
Federal estate taxes can significantly decrease inheritances, as well. Thus, the primary function of living trusts is to increase inheritances by avoiding probate and estate taxes.
The individual who sets up a trust is called the grantor, trustor, or settlor, while the trustee is the person in charge of managing the assets allocated to the trust. A grantor is often the same person as the trustee in living trusts, and she names a successor trustee to assume her duties upon her death or if she becomes unable to performing adequately. Although a successor trustee gains the authority to conduct transactions with the trust's assets--such as buying and selling property--when the grantor-trustee dies, his primary obligation is to distribute the trust's assets to the beneficiaries named in the trust instrument.
Basic living trusts allow assets to skip probate and go directly to the heirs. Moreover, since probate documents related to assets and debts enter the public record after they are submitted to the probate court, avoiding the process keeps details about inheritances private.
AB trusts, or marital bypass trusts, are a type of living trust that provide a tax advantage to married individuals who own substantial real estate. Such arrangements permit a spouse to leave his property to a trust in the surviving spouse's name upon his death instead of transferring it directly to the spouse.
The indirect relationship prevents the assessment of estate taxes if the property's value is less than the applicable Internal Revenue Service threshold because the trust owns the property, not the surviving spouse. After the surviving spouse dies, the first deceased spouse's property then passes on tax-free to the heirs named in his original trust.
Living trusts won't prevent a creditor from making a claim against the grantor's property before or after death because a deceased person's estate is legally obligated to settle all legitimate debts.
Living trusts aren't adequate substitutes for wills, either, but rather a complement to them. If a grantor doesn't transfer assets to the trust, they won't automatically be subject to its terms. Instead, the property will be distributed to relatives as stipulated by state law. A will can avoid that by naming a beneficiary for assets not included in the trust.
Although living trusts can be easy to set up, considerable paperwork is involved to transfer ownership of assets to the trust. If a trustee isn't skilled at managing numerous critical documents, an attorney or advisor might be required.
Living trust scams are another concern. Avoid swindlers who frighten people into believing their assets will be mismanaged after their death unless they purchase unnecessary services related to living trusts.
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