There are many reasons why people work hard, aside from maintaining their current livelihood. For a lot of people, one of those reasons is to ensure they can leave assets behind for their loved ones after they've passed away. It's certainly one of my driving forces.
There's something comforting about knowing you can help provide for your loved ones after you're no longer around. Unfortunately, though, this process isn't always as straightforward as many would hope and prefer. There are a few ways to pass on an inheritance, including through a living trust. For those considering that option, let's see if it's the best route.
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So, what exactly is a living trust?
A living trust -- which is sometimes referred to as a revocable trust -- is a legal document that allows a trustor (the person creating the trust) to place assets into a trust that's managed by a trustee for the chosen beneficiary. In many cases, the trustor also acts as the trustee, but typically designates a successor trustee in the event of death or incapacitation.
The trustee manages the trust and then transfers the assets to the beneficiary based on the pre-determined criteria. The assets in a trust can vary widely, but common inclusions are cash, stocks, real estate, life insurance policies, or other valuable goods like jewelry.
A living trust can typically be changed, adjusted, or revoked as long as the trustor is alive, which is how it got its name. On the other hand, an irrevocable trust cannot be adjusted after it has been established.
The main appeals of a living trust
Arguably the most compelling reason for using a living trust is to avoid the probate process. Probate is a legal procedure used after someone's death to authenticate their will and manage the distribution of their assets to the rightful beneficiaries.
The legal oversight that comes with probate can be helpful, but it's often a lengthy process, stretching over months or even years in some cases. Additionally, the costs linked with probate -- including lawyer fees, court costs, costs for appraising assets, and other expenses -- can add up and significantly reduce the inheritance left behind.
Privacy is another important consideration. Wills that go through probate are public records, so details about the beneficiaries and the assets they receive (including their worth) can be assessed by virtually anyone. This information is private with a living trust, preventing a situation where the public can scrutinize the details of the inheritance.
The level of privacy that comes with a living trust can be especially beneficial for high-profile individuals or people who wish to reduce the risk of disputes and conflicts over their estate. For example, a high-profile individual may want to prevent a situation where their affairs become public gossip. Likewise, if someone fears family disputes can happen because of chosen distributions, they may want to avoid the chance altogether.
A living trust may not be the right path for everyone
While a living trust offers flexibility and privacy advantages, it's not the best option for everyone. People with more straightforward estates might find that a conventional will handles all their needs just fine. For example, if your plan is simply to divide an account equally between two beneficiaries, a will can achieve this without the additional complexities of a living trust.
The process of creating and maintaining a trust tends to be more complex than that for a will. You have to draft a trust agreement, transfer assets into the trust, and make sure someone manages it (whether that's you or another designated trustee). Additionally, trusts may have to deal with tax issues that you could otherwise avoid. In contrast, creating a will mainly involves drafting it, signing it, and making sure it abides by state laws.
Deciding if a living trust is the most effective method for you generally comes down to the complexity of your estate and your beneficiaries' needs. What's ideal for one person may not be the ideal choice for another. Seeking advice from a legal professional can offer guidance tailored to your situation.
