What Is a Living Trust?
A living trust is a legal contract or trust established during an individual’s lifetime in which a designated person, the trustee, is charged with managing that individual’s assets for the benefit of the ultimate beneficiary. A living trust is intended to facilitate the transfer of the trust creator’s or settlor’s assets while avoiding the frequently difficult and costly legal procedure of probate. A trustee is designated in living trust agreements as the person who has legal ownership of the assets and property that flow into the trust.
- While the grantor is still alive, a living trust appoints a trustee to manage assets for the beneficiary.
- Fiduciary trustees administer trusts in the best interests of the beneficiaries.
- Living trusts may be revocable or irrevocable.
How Do Living Trusts Work?
A trustee manages a living trust, who has a fiduciary obligation to administer the trust responsibly in the best interests of the trust’s beneficiary or beneficiaries specified by the trust settlor, also known as a grantor. When the settlor dies, the assets are distributed to the beneficiaries in accordance with the grantor’s desires as described in the trust agreement. A living trust, unlike a will, is in force while the settlor is alive and does not have to go through the courts to reach its intended beneficiaries after the settlor dies or becomes incapacitated.1
Different Kinds of Living Trusts
Irrevocable or revocable living trusts are available. A living revocable trust allows the trust settlor to choose himself or herself as trustee and seize control of the trust’s assets. However, since the assets in the trust remain a part of the trust settlor’s estate, the person may still be liable for estate taxes if the estate is worth more than the estate tax exemption at the time of death. The trust settlor may also update or amend trust regulations at any moment. This implies that the trust settlor is free to modify the beneficiaries or cancel the trust entirely.
The settlor of an irrevocable living trust gives up some control powers over the trust. The trustee essentially becomes the legal owner, but the individual’s taxable estate is reduced. The specified beneficiaries are fixed once the trust agreement for an irrevocable living trust is formed, and the settlor has minimal ability to change that arrangement.
Asset Distribution in Living Trusts
A living trust may be designated as the beneficiary of certain assets that would ordinarily pass immediately to the specified beneficiary regardless of what is written in a will. Employer-sponsored retirement funds such as 401(K)s, individual retirement accounts (IRAs), life insurance policies, and specific bank accounts such as Payable on Death (POD) accounts are examples. Living trusts may include trust accounts established throughout the settlor’s lifetime rather than the following death as specified in a final will and testament.
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