What Items Should Be Put Into a Living Trust?

By A.M. Hill

A living trust is created during a person's lifetime and comes in two types: revocable and irrevocable. A revocable trust allows you to freely transfer your property in and out of the trust. By contrast, the maker of an irrevocable trust cannot serve as trustee or exercise control over the trust's assets, so irrevocable trusts are less flexible than revocable trusts. Many people fund their revocable trusts with their most valuable assets, which usually include the family home, bank accounts and investments.

Avoiding Probate

One of the most common reasons people create trusts is the desire to avoid probate, which can be a lengthy and expensive process. But it's not always necessary to place assets in a trust to avoid probate because certain types of property pass directly to a decedent's heirs automatically upon his death. Common nonprobate assets include those with named beneficiaries and jointly-titled real estate with rights of survivorship. Assuming your estate consists mostly of nonprobate property and you don't need a trust for other reasons, like protecting assets from creditors, a living trust might not be worth the time and expense.

Life Insurance Trusts

If you've accumulated considerable wealth, you might be concerned about your loved ones owing estate taxes. An irrevocable life insurance trust is an estate planning tool for reducing or even eliminating estate taxes. The trust is funded with a life insurance policy that names the trust as the beneficiary. Because the trust, and not you, owns the policy, it isn't counted as part of your estate when you die. A very large policy can significantly reduce the size of your taxable estate.

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Potential Pitfalls

Generally speaking, placing some types of assets in a living trust can be problematic. Retirement accounts like 401(k)s, for example, must be owned by an individual to qualify for deferred income tax treatment. If you change the title to a living trust, the transfer is treated as a withdrawal of the entire account balance, which triggers tax on the total amount. An alternative is to name the trust as a primary or secondary beneficiary of the 401(k).

Safeguarding Assets

Spendthrift trusts are popular with parents and grandparents who want to provide for their offspring but wish to safeguard against the children's future irresponsibility. With this type of living trust, the beneficiary is entitled to benefit from the trust's assets, but has no authority to transfer or sell her interests. The trustee maintains complete control over the trust, so it is protected from the beneficiary's creditors until she receives funds from the trust's assets.

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Is a Living Trust Liable or Subject to Probate?


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Are Living Trusts Exempt From Lawsuits?

Trusts can provide many advantages for asset protection, as well as easing the transfer of property from one generation to the next. However, not every trust protects assets from creditors or lawsuits. Testamentary trusts, which only become active after your death, can protect assets from your beneficiaries' creditors. However, living trusts, created during your lifetime, only provide protection from lawsuits against you if the trust is irrevocable.

How to Move an IRA to an Irrevocable Trust

Your irrevocable trust is a permanent agreement that describes how your trust assets are managed, identifies who receives the trust's contents and appoints someone to oversee the trust –– known as the "trustee". You can't directly transfer an IRA account to your trust during your lifetime, but you can name the irrevocable trust as the IRA's beneficiary when you die. In this way, the entire account balance that would normally pass to your beneficiaries as lump sum, and on which they would have to pay taxes, goes, instead, to the irrevocable trust. IRS rules allow the beneficiary to take minimal annual distributions from the trust. These distributions continue over the expected lifespan of the oldest beneficiary of your trust, thus lowering, and sometimes eliminating, taxes.

What if My House Is Not Paid for: Can I Put It in My Living Trust?

A living trust is an estate planning tool that acts as a holding area for property. A grantor -- the legal term for a person who creates a trust -- can add many types of assets to a trust, including a house with a mortgage, bank accounts and personal property. Property is placed in the trust for the benefit of the trust's beneficiaries, to whom the trust assets are distributed according to the terms of the trust. A trustee, who can also be the grantor, manages the trust and its property.

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