Living trusts enjoy a certain mystique, but in reality, they don’t all hold vast wealth. They’re just legal entities set up to hold ownership of property. A trust has a settlor – the individual who creates and funds it with his property – and a trustee or trustees who are responsible for managing the assets placed there. Finally, there are the beneficiaries, those who receive the trust’s property or money at a time of the settlor’s choosing. The majority of living trusts are revocable.
Living vs. Testamentary Trusts
Not all trusts are living or, in legal terms, inter vivos. Trusts can also be testamentary – they don’t come into existence until the settlor dies. He makes provisions for such a trust in his will, leaving directions for his executor to form it and move some or all of his property into it. By definition, living trusts are just the opposite – they’re personally created by the settlor during his lifetime.
You Can Change Your Mind
Living trusts are either revocable or irrevocable. Revocable trusts allow you to change your mind after you create and fund one. As the settlor, you can name yourself as trustee and personally manage the property you’ve placed into the trust. You can even be a beneficiary, directing the trust to pay you any income its assets earn. You can change your beneficiaries. You can do away with the trust entirely if you like, putting its assets back under your personal ownership. Comparatively, an irrevocable trust is a done deal. After you fund it, someone else – the trustee you’ve named in the formation documents – takes over management. You can’t take your property back. You don’t own it any longer – your trust does.
Revocable Trust Advantages and Disadvantages
Both revocable and irrevocable trusts avoid probate, so your estate won’t get bogged down in the court system after your death. Because they avoid probate, the details of your estate and who you left your property to remain largely confidential – trust documents are not available to the public as wills are. Living trusts are harder than wills to challenge or contest if one of your heirs or beneficiaries is unhappy with the terms. But unlike irrevocable trusts, revocable trusts do not avoid estate taxes. For taxation purposes, your estate is what you own at death and you still technically own the assets you place in a revocable trust – therefore, they’re subject to tax. During your lifetime, you report all your revocable trust’s income on your personal tax return. Revocable trusts generally offer no protection against creditors because the property held within them is still your property.
Your revocable living trust automatically becomes irrevocable at the time of your death because you’re no longer available to make changes to it or undo it. For this reason, it’s common to name a successor trustee to take over management of the trust when you die. Your successor trustee can also take over if you become incapacitated and unable to handle your own affairs. Your incapacitation makes your trust irrevocable just as your death does, but it can revert to revocable again if you recover and take back the reins. After your death, the successor trustee can transfer the trust’s assets to your beneficiaries according to the terms you’ve set in the formation documents. Or, if you prefer, he can create other irrevocable trusts and move the property into them. This might be an advantage if you don’t want your beneficiaries to inherit everything right away in a lump sum, for instance, because they’re minors or have credit issues and you don’t want their creditors to get your property. In this case, you can direct your trustee to set up one or more new trusts and make incremental payments to them instead.
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