A living trust is a way of managing assets, a tool used primarily in estate planning. It offers a number of advantages over a last will and testament, including greater flexibility in the management and distribution of your assets. Living trusts are governed by state laws and these laws differ slightly from state to state.
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Under a living trust arrangement, you transfer control of trust property to a trustee, who administers the property in accordance with instructions you provide in a written trust document. You must name beneficiaries and the trustee must distribute trust property to the beneficiaries as you instruct. It is called a living trust because, unlike a will, it goes into effect while you are still alive. A trust can be revocable or irrevocable. If it is revocable, you can amend or revoke it any time you wish. If it is irrevocable, you no longer own the property. You can easily obtain a fill-in-the-blank living trust document from an online legal document provider and tailor it to your particular circumstances.
One important reason to establish a living trust is so trust assets don't have to go through probate after you die. The trustee can distribute trust assets to beneficiaries both before and after your death without delay, as long as the distributions are authorized by the trust document. If you establish an irrevocable trust, creditors generally cannot reach trust assets unless the trust itself owes the debt. If your estate is large enough to be subject to estate tax - typically an estate worth $5.12 million or more, as of 2012 - placing assets in an irrevocable trust means the IRS can't count them for estate tax purposes.
Examples of How Living Trusts Are Used
One use of a living trust would be to include a provision in your trust document that instructs the trustee to distribute assets to a financially irresponsible relative in equal monthly installments, both before and after your death. If your assets went through probate, by contrast, these assets could not be distributed until after you die. You might also establish a living trust to fund a charity, and instruct the trustee to invest the assets and distribute only profits to the charity. In this way, your trust could continue indefinitely.
You must transfer title of all titled trust assets into the name of the trustee to avoid probate, including any assets you add to the trust after you establish it. This might be more trouble than it's worth if your estate is small because many states offer expedited probate procedures for small estates. To save estate taxes or protect your assets from creditors, the trust must be irrevocable - meaning you lose ownership and control of trust assets. If you continue to treat trust assets as your own, a court might rule the trust a sham and allow creditors and the IRS to reach trust assets.