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When considering a strategy for your estate when you have passed away, it is important to have a clear estate plan. This includes an initial Last Will and Testament, but you may want an added layer of protection for your assets. To accomplish this and avoid the probate process, you can create a living trust.
A living trust is a legally-binding document that creates an entity for your assets to be secured until after your death. The person who creates the trust is known as the trustee and they have control over the living trust during their life.
As the trustee, you would set up the living trust while you are alive and add assets and property to it. Similar to a will, you can name an executor to handle the estate that's in the trust after you die. You can also name beneficiaries for the trust.
There are two types of living trusts, an irrevocable trust and a revocable trust. Both types will keep your estate safe and avoid the probate process.
A revocable trust does not go into effect until after the trustee dies. They are able to make changes to the trust and withdraw assets if needed. This type of trust allows a lot of flexibility for the person creating the trust, especially if funds ever need to be withdrawn or the trust itself needs to be cancelled.
An irrevocable trust becomes effective immediately upon creation of the document. Any assets and property placed in the trust are considered property “of the trust” and no longer part of the trustee’s estate. Additionally, the trust cannot be altered or cancelled. One of the primary benefits of an irrevocable trust over a revocable trust is the assets are protected against lawsuits and most estate taxes.
Another type of trust differs from a living trust in that it is created when the testator dies. A testamentary trust is created through the Last Will and Testament of the testator. This type of trust is created from proceeds of the estate, often from a life insurance policy or other financial account.
A trustee is generally appointed to manage the trust. A testamentary trust is often created to care for minor children or loved ones with disabilities. The testator is able to set the terms of the trust, including the expected expiration date.
A living trust is initially set up with a legally binding document that lays out the instructions for the trust. It also states the appointed executor and chosen beneficiaries. An advantage of a trust is it can be handled privately without going through the probate court.
You can hire an attorney to draft the paperwork, however, you are also able to create the documentation for a living trust on your own. To be legally valid, you must sign the document in the presence of a notary public.
Once you have set up a trust, the next step is to “fund” it. Here is how to take the next step correctly:
If you have chosen to set up a revocable living trust, you do have the option to revoke the trust at any time. As long as you are still alive and mentally capable of making the decision, you can make the necessary changes.
To revoke the trust, you need to remove the assets and property from the trust by changing the beneficiary and title holder to you or whoever you choose. After that step has been completed, you need to sign and notarize documentation (Revocation of Living Trust) to legally close the trust.