A living trust is one of the most commonly used estate planning tools, but what distinguishes a trust from a will?
Rather than make a simple statement of what assets go to what parties, you fund the trust and choose a trustee to administer it according to your wishes. If you’re contemplating becoming the settlor (founder) of a living trust and want to know the advantages and disadvantages of this legal relationship, keep reading.
Pro 1: Flexibility
A living trust is the way to go if you’re seeking maximum flexibility.
Since you (and, later, your surviving trustees) will enforce the conditions of the trust, you can set aside funds that your descendants must use in a certain way. Commonly, settlors set aside funds that their beneficiaries can use for education, real estate purchases, or travel. You can also establish specific conditions that beneficiaries must meet to access the assets, like age or stage-of-life requirements. For example, you can allocate enough money to pay for a future grandchild’s first year of college or their first house after getting married. The trustee will release those funds to the grandchild once they enroll in college or after their wedding.
Depending on the type of trust you create, you may be able to change how your assets are managed while you are still alive. In a revocable living trust, you can submit amendments at any time. Irrevocable living trusts cannot change.
Pro 2: No Probate Necessary
Probate court can be a lengthy, bureaucratic, and overall painful experience for your descendants. Heated arguments between family members about who gets what only add to the stress.
However, if you have a living trust, the assets in the trust will not go through probate proceedings. Rather than an executor or court administering your estate, as they would with a will, your designated trustee handles the business of managing and distributing your assets to the beneficiaries you choose.
Pro 3: Privacy
The privacy advantages of a living trust stem from the fact that assets in the trust do not go through probate court proceedings. Probate is a very public process, and in addition to family members making challenges, so can creditors and con artists seeking to take pieces of your estate for themselves. Any asset distribution under a trust will happen quickly and be invisible to the public eye.
Con 1: Control
A trust is an independent entity. You can manage it while you are alive as both the settlor and the trustee, but despite the wishes and motivations you have recorded, the trustee you designate will control your estate after you die. It will ultimately be up to them to distribute your assets the way you intended. They will determine whether beneficiaries have met the conditions that make them eligible to receive assets for which you set conditions.
Con 2: Responsibility and Paperwork
You are responsible for funding the trust while you are alive. If you don’t put your assets into the trust, your beneficiaries will not have guaranteed access to them upon your death.
Further, remember that only the items in the trust bypass probate proceedings. As such, for best results, you may have to file or refile more paperwork than you would with a will. We advise our living trust clients to ensure their real estate, vehicles, accounts, and other financial products are in the name of the trust.
Con 3: Taxes
This disadvantage depends on the type of trust you use. With a revocable trust, you have more control while you are alive. However, the items you move into and out of the trust are still tied to your taxpayer ID number, and the federal and state government can still charge you income tax, and potentially estate tax, on them.
With irrevocable trusts, you completely transfer ownership of the items from you to the trust itself. There may be gift taxes relating to the transfer, but in the long term, they may not be subject to estate taxes if your estate exceeds the value threshold.
Contact an Estate Planning Attorney Today
At Arenson Law Group, PC, attorney James W. Radig and his team help clients leave the legacy they desire, whether through a trust or a will. We can answer your questions in a consultation and help you determine which option is best for your situation. Call the Cedar Rapids estate planning lawyers of Arenson Law Group, PC today at (319) 363-8199 to get started.