What Is a Living Trust?

By A.K. Jayne

If you are married, have children, or have assets totaling more than $100,000, then you may want to consider setting up a living trust. A living trust is a document that explains how you want your assets distributed after your death, as well as how you want those assets managed if you become incapacitated. Like a will, a living trust can be used to name guardians for minor children in the event of your death or disability.

History of Living Trusts

In 16th-century England, the King would oversee the distribution of land when a landowner died. In order to avoid this, landowners would deed their land to the Church, which promised to return the land to the owner's heirs upon his death. According to the Save Wealth website, English settlers brought these customs with them when they immigrated to America in colonial times. However, living trusts remained the domain of the wealthy until the 1960s.

Establishing a Living Trust

Estate attorneys can draft living trust documents. The trust does not take effect until the grantor -- the creator of the trust -- funds the trust by transferring ownership of property into it, notes the AARP. When establishing a trust, the grantor names beneficiaries -- the heirs who will receive the assets in the trust. A grantor must appoint a trustee to control the assets transferred to the trust. You can appoint yourself as the initial trustee to maintain control over the trust's assets during your lifetime.

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Benefits of Living Trusts

One of the more appealing benefits of establishing a living trust is that they are a way to avoid probate. This is because a living trust is recognized as a private legal entity, permitting the trustee to make distributions to beneficiaries without the involvement of a court. In addition, living trusts can be funded with stocks, bonds, property, life insurance and savings accounts. By establishing a living trust, you -- and your spouse if married -- can take advantage of estate tax credits. These credits protect up to $2 million in assets for singles and up to $4 million for couples.

Disadvantages of Living Trusts

While living trusts do afford grantors a significant tax benefit, assets over the respective $2 million and $4 million limit will be taxed at rates as high as 46 percent. In addition, living trusts do not provide protection from creditors or divorce. The Save Wealth website notes that some individuals and couples might wish to consider advanced estate planning tools such as legacy trusts, which offers asset protection that a living trust does not.

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A Living Trust Explained

References

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Is a Living Trust Liable or Subject to Probate?

A living trust holds assets that are managed by a trustee for intended beneficiaries. Also called a revocable trust, it differs from other trusts in that the trust creator, or grantor, can also serve as the trustee and can make changes to, or even revoke, the trust in its entirety during his lifetime. Living trusts are attractive because the grantor retains ultimate control over his assets while he is alive, but they are most commonly used to avoid probate.

How to Create a Legal Trust

A trust is a legal instrument that is useful for tax and estate planning. Under a trust arrangement, a trustee manages assets you transfer to the trust for the benefit of beneficiaries you select. You retain only indirect control over trust assets – the trustee must dispose of the assets as you direct in the trust deed that creates the trust. A trust is fairly simple to create, although it is prudent to have a lawyer look over the trust deed before you sign it.

Wills Vs. Deeds

While wills and deeds are completely different documents -- a will disposes of one's estate upon death and a deed passes an interest in land or other real property -- both of them have the effect of transferring ownership of property, and both can be used in disposing of such property in the context of estate planning. Deciding how to pass ownership of property to one's heirs -- whether to leave it in a will or convey it now via a deed -- requires a consideration of the advantages and drawbacks of each.

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