What Are the Benefits of a Living Will Trust?
People often confuse the terms "living will" and "living trust," thinking they are one and the same. In fact, these are separate documents that are both important pieces of a solid estate plan. Both documents help you plan for an unfortunate event in the future, such as your death or incapacitation. Additionally, a living trust provides other significant benefits such as avoiding probate and providing tax savings.
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Living Will
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A living will is a legal document that instructs health care providers how to handle the scenario in which you become incapacitated. Many living wills, for example, instruct doctors to remove you from life support after, say, 14 days of coma or nonresponsive brain activity. The living will can be a great blessing to family or loved ones who otherwise would have to make a difficult decision on your behalf.
Living Trust
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A living trust is a legal relationship that you can create to hold some of your property. A trust is a three-party relationship involving a trustor (you, the person creating the trust), a trustee (the person or entity who manages the trust property, usually an attorney or bank), and one or more beneficiaries (the people you designate to benefit from the trust property). It is called a "living" trust because you create it while you are still alive, and it holds your property while you are alive. But, importantly, the trust continues to exist when you die.
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Avoiding Probate
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A living trust helps you avoid probate. Probate is the legal process where your will is submitted to a judge, the judge interprets the will and makes sure it is valid (meaning, makes sure it is actually your legal will), and then orders your personal representative to disburse your property according to the terms of your will.
Probate is often a time-consuming and expensive process, especially if somebody challenges the will (like a family member who didn't get enough money, they think, under your will). Any property held in your trust is technically not owned by you, which means it does not have to go through probate as part of your will. This can be a huge benefit to your surviving family members and loved ones.
Tax Savings
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A trust can provide significant tax benefits, too. For example, let's say you have a high income which places you in the 40 percent income tax bracket. You own some investment property that produces about $100,000 per year in rental income. At 40 percent, you would pay $40,000 in taxes. However, if you instead place the property into an irrevocable living trust, the trust will probably fall into a lower income tax bracket, say 25 percent, so the trust would only pay $25,000 in taxes. You have saved $15,000 in taxes by placing the property in trust. Just remember to name yourself as the beneficiary (or at least one of the beneficiaries) so you can benefit from the trust income.
Property Management
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Another significant benefit of the living trust is that it allows you to benefit from professional property management. When you appoint a trustee, you can appoint somebody who is experienced in handling whatever kind of property you place in the trust. If you put real estate in the trust, you can appoint a real estate attorney as trustee, and the attorney may be able to produce more income and provide more tax savings than you could have done on your own. Additionally, if you ever get into an accident and are left incapable of managing your property, then a trust comes in handy because the trustee handles the property, which means the property will be taken care of even though you couldn't do it yourself.
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