What Is a Living Trust and How Can It Protect Your Children?
A trust is worth investigating if you have a family. It's a legal tool that has the potential to protect your children, assets, and more. A living trust is a popular consideration in many estate strategy conversations, but its appropriateness will depend upon your individual needs and objectives. Learn more about what a living trust is and some of the potential benefits of a living trust to help you determine whether a living trust is right for your situation.
What Is a Living Trust?
A living trust is created while you and your spouse are alive and funded with the assets you choose to transfer into it. The trustee or trustees have full power to manage these assets. Married couples typically make themselves the trustees. A living trust will also designate a beneficiary, or beneficiaries, much like a will, to whom the assets may be automatically passed on upon your death.
Wills vs. Living Trusts
|Names guardian for children||✅||❌|
|Names beneficiaries for assets/property||✅||✅|
|Allows Revisions/Changes||✅||Yes, In most cases|
|Age limit on when children inherit||❌||✅|
|Stipulations on children's care/inheritance||❌||✅|
If you create a revocable living trust, you may change the terms of the trust, the trustee, and the beneficiaries at any time. You can also terminate the trust altogether. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with an estate planning professional.
Why Create a Living Trust?
The living trust offers a number of potential benefits:
- Avoid Probate: Assets are designed to transfer outside the probate process, providing a seamless, private transfer of assets without probate costs.
- Manage Your Affairs: A living trust can be a mechanism for caring for you and your property in the event of your physical or mental disability, provided that you have adequately funded it and named a trustworthy trustee or alternative trustee.
- Ease and Simplicity: It is a simple matter for a qualified lawyer to create a living trust tailored to your specific objectives. Should circumstances change, it is also a straightforward task to change the trust’s provisions.
- Avoid Will Contests: Assets passing via a living trust may be less susceptible to the sort of challenge you might see with a will transfer.
- Privacy: A trust offers more privacy than a will which has to be in public records.
The Drawbacks of a Living Trust
Living trusts are not an estate planning catch-all. They won’t accomplish some potentially important objectives, including:
- A living trust is not designed to protect assets from creditors. It is also considered a “countable resource” when determining your Medicaid eligibility.
- There is a cost associated with setting up a revocable living trust.
- Not all assets are easily transferred to a living trust. For example, if you transfer ownership of a car, you may have difficulty obtaining insurance, since you are no longer the owner.
- A living trust is not a mechanism to save on taxes, now or at your death.
- If you own a business or part of a business, separate or additional arrangements may need to be made.
Revocable vs. Irrevocable Trusts
Sometimes, you might hear a living trust referred to as a revocable trust, meaning that you can make changes to it after it’s created. These changes could include changing beneficiaries or trustees, changing the assets that are included in the trust or modifying any stipulations.
This is in comparison to an irrevocable trust, which is a trust that can’t be changed after it’s created. Generally, irrevocable trusts remove assets from your estate, which may limit estate tax upon your death. Irrevocable trusts require a qualified attorney to set them up.
Revocable trusts tend to be more applicable to most families. This is a multi-faceted question that requires qualified financial and legal advice to fully answer what is best for your family.
Protecting Children from Themselves
If you and your spouse both passed before your children are grown, that presents a challenge. On the one had, you will want children to receive care for shelter, education, and other parts of a healthy life. On the other hand, you might worry about what a child who inherits money at the age of 18 will do without you there to guide them. A trust is a way to balance these goals. One way is by making rules in the trust that provide for a child's care but also prevent them from fully inheriting and controlling assets until a time you specify. For example, you could specify that assets could be used for a child's care and education (college) but they do not fully control the assets until they turn 30. An attorney can help provide additional options and ways to help protect children long into the future.
"An inheritance gained hastily in the beginning will not be blessed in the end." Proverbs 20:21 ESV
Considerations for Children with Special Needs
If you have a child with special needs, you need to think about care for them in the future. A living trust can include provisions to care for children in ways you and your spouse specify. If you have a child that requires ongoing or specialized care, you may require a different solution. A "special-needs trust" is similar to a living trust, but includes provisions and language specific to unique care needs. If you believe your family may fall in this category, be sure to speak with a qualified attorney about your specific family situation to make sure the approach matches your needs.
Picking a Guardian for Your Child
Is a Living Trust Right for Me?
Every estate planning situation is different, so consider working with a financial advisor or attorney who understands your unique situation. But these questions may offer further insight into whether a living trust is right for you:
- Will you be leaving significant assets to your heirs? Trusts cost more to establish than wills, but they may pay for themselves if you are able to avoid the expenses associated with probate.
- Is privacy a concern for you? With a living trust, all assets are kept confidential and aren’t part of public record (unlike a will).
- Do you expect your will to be clear-cut without much dispute? If so, you may not need to incur the expense and process of creating a living trust.
- Is there a minimum net worth necessary for you to create a living trust in your state? An estate planner will be able to help you with this concern.
- Will you and your spouse have different beneficiaries, such as children or grandchildren? If so, a living trust may help determine where each spouse’s assets will go without needing the probate process.
Living trusts are just one piece of the larger estate planning puzzle. Ensure your assets are protected and organized when you go to your heavenly reward by working with a qualified estate planning professional.
Pros and Cons of a DIY Will
This blog post is intended to be educational in nature. It does not constitute legal, tax, accounting, or financial advice in any way, shape, or form.
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