Unlike other types of trusts, living trusts are active while the grantor is — you guessed it — alive.
So what’s the difference between a trust and a will, and how could a living trust affect your estate? Financial planners in Mount Pleasant at Morris Financial Concepts will break down the similarities and differences between these important documents, and see how they could fit into your legacy planning.
What is a Living Trust, and Do I Need One?
Living trusts are designed to efficiently pass along your assets, such as real estate, vehicles, financial assets, and personal items, to chosen beneficiaries at the time of your death. As the grantor, or trust creator, you create a legal agreement that outlines who you want to manage your assets, commonly known as the trustee, how the assets should be divided between beneficiaries, and when you want the transfer to happen. The assets become the property of the trust, managed by the trustee until they transfer to your heirs.
One common misconception about a living trust is that it is very similar, if not identical to, a will. While both documents aid in the asset distribution process, knowing the difference between these two items allows for you to make the most informed decision regarding which route is the best fit for your individual situation.
Living Trust vs Will
One of the primary benefits of setting up a living trust is the ability to avoid the dreaded probate process, which you must undergo with a will. Probate is the legal verification and review of a will. This process typically lasts around eight months or more and involves paperwork, court appearances, and extensive lawyer and court fees. These fees can quickly add up, sometimes amounting to as much as 5% of your estate’s total value. Since assets added to the trust are owned by the trust, they are no longer considered part of your estate and waive the need for the probate process. Both documents can be completed independently, however, a lawyer fee will be incurred for each — should you choose to outsource.
A living trust can also offer an element of privacy that a will lacks. Wills are filed under public record after probate, meaning anyone has the ability to see the address of your home’s new owner, comparative sizes of your beneficiaries’ inheritances, and the contents of your estate. This creates the possibility for targeted junk mail and unwelcome real estate inquiries, in addition to family disagreements or home security breaches. The terms and contents of a living trust, on the other hand, are only accessible to the people included in it. It protects your legacy planning from prying eyes and keeps your private matters private.
Another important difference deals with the control that the grantor has regarding his or her assets. A living trust provides the grantor with additional control over his or her distribution of assets in comparison to a will. For example, a trust provides stipulations regarding distributions to beneficiaries, such as an age specification or monthly allotment. Additionally, the grantor is able to define how the property is used, such as monetary allowances for education expenses, whereas a will simply provides the property to beneficiaries without regulating how or when it is utilized.
While a will does not take effect until the grantor dies, trusts can plan for the possibility of incapacitation before death.
Revocable Living Trusts
A revocable living trust is a trust that can be altered. As the grantor, you can modify the terms and conditions, add or remove beneficiaries, dissolve the trust, or assign a new trustee at any time.
This trust offers you the most control over your assets. You can even name yourself the trustee, which gives you the ability to manage your assets exactly as you did before turning them over to the trust. You will need to name a successor trustee to take over when the time comes, but you can handle the assets at your discretion until then. Regardless of whether or not you choose someone else to be the trustee, you are still able to modify the terms and contents of trust as the grantor.
While a revocable living trust’s flexibility makes it more user-friendly for the grantor, that control can work against you when it comes to reducing your taxable estate. Your name may not be on the title of that BMW anymore, but it’s still subject to property taxes, estate taxes, and claims by creditors since you have the ability to dissolve the trust and take back ownership at any time.
The Big Picture
A revocable living trust is a straightforward method of simplifying your asset distribution process. It doesn’t offer any hidden tax reductions or extra protection, but it lets your heirs receive their inheritance on your terms, promptly, privately, and without extra court fees. If avoiding probate is a priority in your legacy planning, Charleston’s Morris Financial Planning professionals can help you decide if a revocable living trust is right for you.
Irrevocable Living Trusts
As the name implies, irrevocable living trusts can’t be modified. The original terms are set in stone, and the assets given to the trust permanently belong to the trust until they transfer to your beneficiaries.
The limitations this trust places on the grantor are actually one of its greatest strengths. When it comes to reducing your taxable estate, an irrevocable living trust can be a powerful legacy planning tool. Assets in a revocable trust are still taxed as the grantor’s property because the grantor has the option to take them back. Assets in an irrevocable trust, however, can never go back to the grantor, so they aren’t included in the grantor’s taxable estate. They also aren’t counted toward the Medicaid eligibility asset limit, and they can’t be claimed by creditors.
Once you place an asset in an irrevocable trust, it’s out of your control for good. Since you can’t serve as your own trustee, you can’t remove or reassign assets, change the terms of the transfer, or revoke the trust. For example, if you include your primary real estate deed in the trust, you won’t be able to sell that house if you want to move or downsize later on. Make sure you’re absolutely certain of your decision before you place assets into an irrevocable trust — the terms of the trust are binding even if you have a major falling out with a beneficiary or experience unexpected financial issues.
The Big Picture
An irrevocable living trust has more limitations than a revocable living trust, but it also has unique tax and estate advantages that make it a strong option in some cases. If you work in a profession that frequently faces lawsuits, if you plan to use Medicaid for long-term care, or if you prioritize reducing your taxable estate, an irrevocable living trust could be a good course of action for your legacy planning. Charleston financial advisors and wealth managers at Morris Financial Concepts can help you decide if an irrevocable trust makes sense for your situation and provide financial guidance as you take the next step.
Regardless of where you are in your legacy planning process, a CERTIFIED FINANCIAL PLANNER™ from the Charleston-based Morris Financial Concepts team is ready to formulate a plan for your wealth management so that you are confident that you have created the best possible future for your family and possessions.
The opinions expressed herein are those of Morris Financial Concepts, Inc. (“MFC”) and are subject to change without notice. MFC relies on information from various sources believed to be reliable, including third parties, but cannot guarantee the accuracy and completeness of any third-party information. The information contained herein is for educational purposes only and is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. The recipient should take their own independent legal, tax and financial advice. MFC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about MFC including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. Certified Financial PlannersTM (CFP®) are licensed by the CFP® Board to use the CFP® mark. CFP® certification requirements include: Bachelor’s degree from an accredited college or university, completion of the financial planning education requirements set by the CFP® Board (www.cfp.net), successful completion of the CFP® Certification Exam, comprised of two three-hour sessions, experience requirement: 6,000 hours of professional experience related to the financial planning process, or 4,000 hours of Apprenticeship experience that meets additional requirements, successfully pass the Candidate Fitness Standards and background check, agree annually to be bound by CFP® Board’s Standards of Professional Conduct, and complete 30 hours of continuing education every two years, including two hours on the Code of Ethics and Standards of Professional Conduct. MFC-21-12.