A living trust is an important estate planning tool. It allows you to place the bulk of your assets -- securities, property and cash -- into a trust fund to be managed and administered by a trustee. While you are alive, the trustee manages the trust according to the instructions contained in the trust document. After your death, the trust is transferred to the beneficiaries you chose.
One reason people establish a living trust is that it provides a way to manage your assets in the event that you become incapacitated. A living trust may be established that only takes effect in the event of your becoming incapacitated. At this point, your assets would be transferred into the trust and managed for you. People also establish living trusts when they are unsure how to manage their own assets -- for example, if they suddenly come into a great deal of money. In this case, a trusted financial adviser would be appointed as trustee. Trustees are required by law to act in the best interest of the principle.
How It Works
You establish a living trust using a legal document that transfers all of your assets into a trust fund and appoints a trustee to manage those assets. The document also contains your instructions for how the assets should be managed. A living trust does not make much difference while you are healthy or alive, as you can change or cancel the trust at any time. All of the benefits take place in the event you are incapacitated or die. A living trust can save probate costs when you die and can ensure that your assets are being responsibly managed for your benefit in the event that you become incapacitated.
Some people establish a living trust in order to avoid probate and executors' fees in the event of their death. It is impossible to avoid all estate fees and taxes using a living trust; but if you own a large estate, a living trust can help you avoid some fees. For example, if you own real estate in two states, then following your death, it would normally be required to conduct probate in both states. However, if you have a living trust, your estate only undergoes probate in the state where the trust is established, saving you probate fees in one state.
A living trust is not generally necessary unless you own a large or complex estate. If you have a small estate and are married, it may be easier and cheaper to own all of your assets jointly with rights of survivorship. In this way, your spouse will not need to pay inheritance tax upon your death, and probate will be simplified. Living trusts also do not offer any tax benefits over a will. If you have minor children or dependants, a living trust will not act as a legal guardian, and you will still need a will in order to appoint a guardian for your children. However, you can incorporate your living trust into your will, by leaving the proceeds or contents of the trust to your heirs.