What Are the Benefits of a Living Trust?
A living trust is a three-party legal relationship involving the trustor (the person who creates the trust), the trustee (the person who manages the trust) and one or more beneficiaries (the people who benefit from the trust). Trusts serve many purposes, including avoiding probate, providing for the professional management of property, minimizing taxes and providing for the management of your property if you become incapacitated.
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Trust Basics
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When you create a trust, you have the power to control the terms and conditions of the trust. You can choose who will be the trustee (often a professional such as an attorney, or the trust department of a bank), and you will name the beneficiaries of the trust. Often, you will name yourself as one beneficiary with other family members or loved ones named as co-beneficiaries, or contingent beneficiaries in case you die or become incapacitated. In the trust document, you will instruct the trustee on the purpose of the trust and how to distribute trust income to the beneficiaries.
Avoiding Probate
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One of the primary advantages of a living trust is the avoidance of probate. Probate is the legal process by which a court accepts, interprets and applies your will. In other words, a judge reads your will and orders your personal representative to carry out the terms of the will. Like all legal proceedings, probate can be expensive and time-consuming. A living trust continues to exist when you die, which means whatever property you transfer to the trust remains in the trust rather than being passed through your will. So whatever property is in your trust avoids probate because it is not in your will. This can save your family or loved ones significant time, trouble and money.
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Professional Property Management
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Legally speaking, you can name anyone you want as your trustee. However, it is common (and wise) for trustees to be professionals such as attorneys or banks. Appointing a professional trustee can help protect whatever property you put in the trust. The professional can make educated decisions about how to invest trust money and what use is best for trust property, such as income-producing real estate.
Minimizing Taxes
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A trust can help you reduce the taxes you pay each year. If you have a high income, you will be in a higher tax bracket. To save on taxes, you can transfer income-producing property to a trust, which means the income is taxed to the trust, not you. The trust will probably have a lower annual income, which means it will be in a lower tax bracket, so you save on total taxes. Keep in mind, though, that to save taxes you typically must create an irrevocable trust, which means you cannot terminate the trust without the permission of the trustee and all beneficiaries.
Incapacitation
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A living trust is also helpful if you become mentally or physically incapacitated. If you place your property in trust, the trustee is charged with handling and caring for the trust property. This means you will be taken care of and your property will be taken care of, even if you lose the ability to make decisions for yourself or for your property.
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