A living trust is a smart estate-planning strategy that enables you to fully organize your finances, assets, and wishes before you die. A will does much of the same, but living trusts offer a faster and streamlined transfer of assets and money to beneficiaries when you’re gone. Wills must go through probate, which can often become complicated, taking months in probate court to resolve. If your goal is to make life easier for your family and beneficiaries if you become incapacitated or pass away, this article explains why you need a living trust.
A living trust, also called a revocable trust, is formed while you’re alive. You can transfer some or all of your money and personal assets into the trust. You can move assets into and out of this type of trust as you please. You can act as trustee while you’re still living, or you can appoint someone else to oversee and manage your trust. You do designate a trustee to take over once you’re unable to for any reason. This ensures your finances, property, and other assets in the trust are managed properly until disbursed to your beneficiaries at the appropriate time.
There is a misconception among some that living trusts are just for the ultra-wealthy. However, that’s simply not true. Living trusts are a great wealth protection strategy, but there are other important reasons people create these entities besides wealth management. While some states do impose net worth requirements to create trusts, those ceilings can be relatively low. So, if you own property and other assets (such as a retirement account), and especially if you have children, you should explore the benefits of creating a living trust.
Below are the Top 7 Reasons Why You Need a Living Trust:
Make immediate provisions for dependents
A trust can be critical if you have dependents. Minor children and disabled children or other family members depend on you. When you’re gone, you want to ensure there is not a moment that their care is left hanging in the balance.
A trust ensures your minor children are physically and financially cared for until they come of age. It can dictate the ages at which your children inherit their portions of your trust—and the trustee makes sure this happens as you wish.
If you have disabled children or other dependents, a trust ensures they are cared for in the manner you provide, without interruption. This can be critical to their overall wellbeing and quality of life.
Bypass probate
A living trust is not subject to probate like a will. Probate involves the somewhat lengthy process of identifying and paying your creditors (if any) after you’re gone. Your will can also be contested, which causes complications that prevent intended beneficiaries from receiving money and assets on a timely basis. All assets in your trust are exempt from probate, so your estate can be settled somewhat quickly upon your death.
Bypass ancillary probate if you own real estate in another state
Probate, as discussed, is the process your will is subject to without the protection of a trust. If you own real estate in the state you live in and die with just a will in place, probate comes into play. Ancillary probate is the process your out-of-state real estate would go through when you pass away—unless you have a trust. Once you establish a trust, you simply deed your property to the trust, and bypass all probate scenarios.
Avoid conservatorship if you become incapacitated
If you become incapacitated and unable to make financial decisions, your trustee ensures your finances and assets (such as property or investment accounts) are maintained efficiently. If you pass away, the trustee oversees your trust and makes allocations from it to your beneficiaries as directed.
Without a trust and trustee in place, a court may end having to appoint a guardian to complete these duties on your behalf. This can equate to a lengthy process for you and your beneficiaries during an already stressful time. This becomes exceptionally important if you are single and have no spouse that can take care of these matters for you and any dependents.
Maintain privacy
This is paramount to some, especially those of high net worth. Once a will goes through probate, it becomes part of a public record. Anyone can access the contents of wills at any time. Trusts are private and remain so even after they are executed and closed. Only certain beneficiaries are allowed access to trusts and their provisions.
Enjoy tax exemptions if you’re married
Another reason you need a living trust is if the estates of you and your spouse total more than the estate tax ceilings listed below:
- Federal estate income tax exemption: less than $11,580,000
- State estate income tax exemption: less than $1,000,000 (depending on the state)
Note that these figures are for 2020, and that state estate taxes vary by state. But, if you are married and your estates exceed these amounts—you’ll both be hit with estate taxes. However, if you each establish trusts and divide your assets somewhat equally between the two, you’ll avoid paying those taxes for each spouse.
Work closely with your financial planner and estate planner to ensure the trusts are set up properly and within your state’s estate tax and federal estate tax exemption guidelines.
Protect your wealth in second marriages
Of course, this also applies to first marriages that occur later in life. If you marry or remarry later in life—after you’ve amassed your wealth and/or have children from a previous marriage—a trust ensures your wealth and assets are distributed to your beneficiaries the way you want them to be.
Closing Thoughts on Why You Need a Living Trust
Trusts are complex entities in that they must be worded appropriately to comply with both federal and state regulations. Keep in mind this article covers living trusts, which are also called revocable trusts. Living trusts allow you or the trustee to move assets into and out of the trust as you deem fit. Irrevocable trusts do not allow that freedom, but they have tax advantages that may be worth considering depending on your wealth. Setting up either trust can ensure that you and your heirs are taken care of and receive the benefits you desire.