Whether you've examined your options for passing along your wealth or not, you probably know there are several possibilities when it comes to managing your wealth and handing it down to the next generation. About 20% of Americans use living trusts as part of their estate plans, and it's a sensible option for many retirees. Keep reading to learn more about living trusts and whether it's right for you.
What is a living trust?
A living trust is also known as a revocable trust or an inter vivos trust. It's a legal document that allows an individual to transfer their assets into a trust while they're alive. By doing so, the individual, known as a grantor or settlor, can manage the trust until they die and make changes as necessary.
What are the advantages of a living trust?
A living trust ensures that your assets are distributed according to your wishes either before or after your death. Since it replaces a will, it has a number of advantages over other methods.
First, it allows your descendants or beneficiaries to avoid probate court, which can be a time-consuming process. By avoiding using a will, a living trust can also protect your and your family's privacy. A will, on the other hand, becomes public record once it enters probate, so anyone can read it. A living trust can keep the distribution of your assets and the beneficiaries private.
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The trust's revocable nature also allows you to make changes as needed or even revoke it if you decide it no longer suits your needs. A living trust also makes it easy for someone else to manage your assets if you become incapacitated, avoiding the need for a court-appointed guardian or conservator.
Are there any drawbacks to a living trust?
Like most legal transactions, a living trust has pros and cons. Among the drawbacks is its cost. They are generally more expensive and complex than a will. There's a multistep process of drafting the trust, transferring your assets into it, and administering it. And there's a good chance you'll want an attorney to help write the trust or sign off on the process.
Living trusts also require their own record-keeping and tax returns since the trust is a separate financial entity from your own assets. Finally, living trusts have a longer contesting period than wills, allowing beneficiaries to protest any distribution from the trust for one to five years after your death.
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What kind of person would want to use a living trust?
Wealthier Americans and those who don't want their assets and disbursements to become public tend to favor a living trust. It can also help ensure that people with blended families or complicated family situations can control how their assets are distributed.
For example, if you had children from a previous marriage but are remarried, you'd want to make sure both your spouse and your children are taken care of, even if they're at odds.
If you've achieved financial success from activities such as investing, running a profitable business, or having a thriving career, you may want an estate plan to ensure those assets are distributed as you see fit. A living trust might make sense for you.
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