What is a Living Trust?

Hope Campbell

Since a sound financial strategy includes an estate plan, FAI works alongside clients through the estate planning process. While discussing your estate plan, your financial advisor or attorney may suggest estate strategies that are new to you, such as a living trust. In this blog, we discuss why a living trust is a popular consideration in many estate planning conversations, but its appropriateness will depend upon your individual needs and objectives.

What is a Living Trust?

A living trust is created while you are alive and funded with the assets you choose to transfer into it, assets such as a brokerage account or real estate. The trustee (typically, you) has full power to manage these assets. A living trust will also designate beneficiaries to whom the assets may be automatically passed on upon your death.

If you create a revocable living trust, you may change the terms of the trust, the trustee, and the beneficiaries at any time. You can also terminate the trust altogether. This is in comparison to an irrevocable trust, which is a trust that can’t be changed after it’s created. Generally, irrevocable trusts remove assets from your taxable estate after you pass, but revocable living trusts keep the assets in your taxable estate.

Why Create a Living Trust? 

The living trust offers a number of potential benefits:

  • Avoid Costly Probate: Assets held inside a living trust are designed to transfer outside the probate process, providing an easier transfer of assets to your beneficiaries. The probate process typically costs between 4-7% of the total value of your estate, so keeping assets out of probate reduces the costs of settling your estate.
  • Family Privacy: With a living trust, all assets are kept confidential and are not part of the public record (unlike a will).
  • Avoid Will Contests: Assets passing to heirs through a living trust may be less susceptible to the sort of challenge you might see with a will transfer.
  • Manage Your Affairs: A living trust can be a mechanism for caring for you and your property in the event of your physical or mental disability, provided that you have adequately funded it and named a trustworthy trustee or alternative trustee.

The Disadvantages of a Living Trust

Living trusts are not an estate planning catch-all. They won’t accomplish some potentially important objectives, including:

  • A revocable living trust is not a mechanism to save on taxes, now or at your death.
  • Not all assets are easily transferred to a living trust. For example, if you transfer ownership of a car, you may have difficulty obtaining insurance, since you are no longer the owner.
  • There is a cost associated with setting up a revocable living trust.
  • A living trust is not designed to protect assets from creditors. It is also considered a “countable resource” when determining your Medicaid eligibility.

Is a Living Trust Right for Me?

Every estate planning situation is different, so consider working with a financial advisor and estate attorney who understands your unique situation. Using a trust involves a complex set of tax rules and regulations. Your estate planning team will analyze the size of your estate, potential estate tax liability, and your beneficiary structure to determine if a living trust is right for you.

Living trusts are just one piece of the larger estate planning puzzle, and FAI can help coordinate your attorney, CPA, and financial advisors to create a plan that is best suited for your situation. Call us at 410-715-9200 to schedule an estate planning meeting with your financial advisor.

The FAI Advantage

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FAI Wealth Management | 410.715.9200 | www.faiwealth.com

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By Hope Campbell

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