Definition
A living trust, also known as a revocable trust, is a legal document created during an individual’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary. It allows the individual to control their wealth while they’re alive and transfer their assets seamlessly after death, avoiding probate. The “living” aspect refers to the ability of the trust creator to make changes to the trust, including dissolving it, during their lifetime.
Key Takeaways
- A Living Trust is a legal document created during an individual’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary.
- Living Trusts can be revocable or irrevocable. The difference is that a revocable trust can be changed or terminated by the person creating it (the grantor) while an irrevocable living trust cannot be changed after it is executed.
- One of the main advantages of a Living Trust is that it avoids probate, which can result in considerable savings of time and money. Moreover, it offers a level of privacy because it’s not made public, unlike a will.
Importance
A living trust is an important financial term because it refers to a legal arrangement created during a person’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of eventual beneficiaries.
It becomes even more significant in estate planning, principally because it can help avoid the process of probate, thereby saving time, court fees, and potentially reduce estate taxes.
Moreover, it allows a great deal of control over when and how your assets are distributed.
Furthermore, in the event the trust creator becomes incapacitated, the living trust can ensure that their assets are managed according to their wishes.
Therefore, its importance lies in providing a mechanism for managing and protecting your assets not only in your lifetime but also upon your death.
Explanation
A Living Trust, often referred to as a revocable trust or an inter vivos trust, is essentially a legal document created during an individual’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary. The primary purpose of a Living Trust is to help individuals manage and organize their assets, providing reassurance that these assets will be administered according to their wishes during their lifetime and even after death.
It is dubbed “revocable” because changes or cancellations can be made at any time by the individual who created it (the trustor) as long as he/she is mentally competent. Another key purpose of a Living Trust is that it aids in avoiding probate—the legal process of verifying a will—which can often be lengthy and expensive.
This gives immediate access to the trustor’s assets by the beneficiaries upon the trustor’s death, enabling a smooth transition that respects the trustor’s financial and estate plans without court intervention. Living Trusts are also used to maintain privacy of one’s estate, as unlike wills, trusts are not public documents, ensuring the details remain confidential.
This financial instrument is an effective tool for estate planning, helping to ensure your financial affairs and asset distribution are handled according to your exact wishes.
Examples of Living Trust
Living Trust, also known as revocable trust, is a legal document through which your assets are placed into a trust for your benefit during your lifetime and then transferred to designated beneficiaries at your death by your chosen representative, known as a ‘trustee’.Here are three real-world examples of a Living Trust:
Property Transfer: Suppose John is a real estate owner who sets up a Living Trust to transfer his properties to his children after his death. This will help his children avoid the time-consuming and often expensive probate process. While alive, John is both the trustee and the beneficiary, maintaining complete control over his properties. After his death, the trustee—usually one of the children or a trusted attorney—takes over and disperses the properties according to John’s instructions.
Individual with a Disability: If parents have a child with a disability, they may establish a Living Trust to provide for the child’s financial needs and maintain eligibility for public benefits after their death. The parents would place assets in the trust and name a trusted individual to manage the trust and use the assets for the child’s benefit.
Family Business: Consider Mark who owns a family business. To ensure the business runs smoothly after his death, he can establish a Living Trust to gradually transfer control and ownership to his heirs. While alive, Mark controls the business as the trustee. When he passes away, his designated successor trustee will continue to manage and eventually distribute the business to the specified heirs, avoiding a sudden change in leadership and potential disputes.
Frequently Asked Questions About Living Trust
What is a Living Trust?
A Living Trust, also known as a revocable trust, is a legal document created during an individual’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary.
What are the benefits of having a Living Trust?
A Living Trust allows asset distribution after your death without the necessity for probate – the legal process used to determine the validity of a will. This can save your beneficiaries time and money. It also ensures a certain level of privacy, as it won’t become public record.
Can a Living Trust be changed or revoked?
Yes, a living trust can be changed or revoked at any time by the person or persons who created it as long as they are still mentally competent. This is why it is often referred to as a “revocable” trust.
Who should consider getting a Living Trust?
Individuals with complex, taxable estates might benefit from establishing a Living Trust. It’s also beneficial for individuals who wish to maintain privacy and expedite the transfer of property upon their passing.
What is the difference between a Living Trust and a Will?
Both a will and a trust are estate-planning tools that specify where and to whom your property should go when you pass away. However, a Living Trust, unlike a will, can avoid probate at death, control many of your assets, and prevent the court from taking control if you become incapacitated.
Related Entrepreneurship Terms
- Trustee
- Beneficiary
- Revocable Trust
- Irrevocable Trust
- Trust Assets
Sources for More Information
- Investopedia: A leading source of financial content aiding consumers to understand complex financial concepts, improve investing skills, and learn how to manage their money.
- Nolo: A source of do-it-yourself legal and business solutions that help you understand and navigate legal and business matters.
- Fidelity: A multinational financial investment services company offering extensive information about various financial instruments, including living trusts.
- LegalZoom: An online legal technology company that helps its users create an array of legal documents without necessarily having to hire a lawyer.
