FAQ About Living Trust
Living trusts, also called inter vivos trusts, are one of the most popular ways to transfer property. But this doesn't mean they're universally well understood. Probate avoidance is the usual motivation for creating a living trust, and making one today is easier than ever before. Some people assume living trusts convey more benefits than they actually do. It's important to understand what a living trust can and cannot do before attempting to create one.
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Why Create a Living Trust?
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The single biggest reason people create living trusts is to leave property to their heirs after their death without going through the probate court process. When property passes through probate it becomes a matter of public record, and the distribution process is supervised by the court, which can be costly and time-consuming. Usually, it takes several months before probated property reaches heirs, and about 5 percent of the estate is lost to attorney and court fees.
Is It Expensive or Difficult to Create a Living Trust?
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Creating a living trust used to be much more expensive than it is now because it was a fairly specialized practice. Now, however, living trusts are so common that many individuals do it themselves with the help of books, computer software and even websites. Even if you do hire an attorney to create your living trust, the cost will still be relatively low. Many attorneys charge a flat rate for Declaration of Trust documents.
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Who Should Be Beneficiaries?
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Spouses are the most common beneficiaries of a living trust. Additional clauses can make your surviving children or parents into beneficiaries upon your death. The beneficiaries should be people close to you so there is not potential conflict in how the trust assets are used during your life. You yourself should be trustee so you retain control of the trust property. A co-trustee, either a family member or trusted adviser, or successor trustee will do the job of managing the trust after your death and ensure your heirs receive their inheritance.
How Does a Living Trust Avoid Probate?
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Only assets and property you own are subject to probate after your death. When you create a living trust, property is owned in trust for the beneficiaries. Usually, you remain the trustee during your lifetime so you retain control of the property. After your death a successor trustee takes your place and the trust goes on without ever going through probate. The successor trustee can then transfer the trust assets to the beneficiaries.
Can a Living Trust Reduce My Taxes?
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Typically, no. The Internal Revenue Service will tax any income or capital gain of the trust to you personally during your lifetime. After your death it will still consider the trust property part of your gross estate for estate tax purposes, even though the property doesn't go through probate. The major exception is when your spouse is the beneficiary, but this is because of an exemption in the estate tax, not the power of the living trust. While other kinds of trusts can create tax savings, most simple living trusts do not.
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- Photo Credit booyabazooka:en.wikipedia
