A living trust is like a plan created by someone while they’re alive to protect their things and say who gets what after they’re gone.
It’s like a special paper that lists what things they want to give and who will take care of these things for the people they want to give them to. It helps avoid a long, public, and complicated process when the person is no longer around.
However, as per a living trust attorney in Orange County, it’s quite difficult to understand how a living trust works. Hence, before you take another step in this regard, it might be best to work with an expert. This way, you can reduce the risk of messing up the paperwork.
How Does It Work?
A living trust lets the trustee take care of certain belongings and give them to the beneficiaries after the original owner passes away.
It all starts when the owner makes a special document before they pass away. This document has all the rules and details about how the belongings should be handled.
Sometimes, people get help from experts who know a lot about planning estates to make sure everything is set up correctly because it can be a bit tricky.
A living trust is formed when someone (the grantor) chooses what they want to include in it. Once it’s done, then they can move the ownership of those things into the trust.
A trustee, who usually takes care of the trust, needs to handle it carefully for the benefit of the beneficiaries. A slip-up in the paperwork,
Living Trust — The Assets Included in It
When you put something into a living trust, it means you’re giving ownership of it to the trust. It works for things like property (like houses or land), money accounts, and stuff that you own (like jewelry or art), and even shares in a business.
Some of the specific financial items and accounts here can include the following —
- The money the owner of the trust owes to you
- Their brokerage and mutual funds
- The non-qualified annuities and the other life insurance policies
- Bond and stock certificates and various safe deposit boxes
- Saving and checking accounts, including cash
Putting your 401(k) or IRA into a living trust isn’t a good idea. If you try to switch account ownership, the IRS could see it as taking out money early.
That might mean owing taxes on almost everything in the account for that year. And if you’re under 59 and a half, there could be an extra 10% penalty on top of the taxes.
Living Trust — The Types
There are usually two types of living trusts that you can go for currently. Let’s keep reading to know more about it.
1: Revocable
A revocable living trust is a rather common type of trust where the person making it (called the grantor) keeps control over what they put in it.
They can even be their own boss of the trust (that’s the trustee part). The cool thing is they can change things whenever they want!
They can switch who gets what, move stuff in or out, or even stop the trust altogether. It’s like having a flexible plan that can be adjusted whenever needed.
A living trust helps protect what you own if you get sick or can’t handle your things.
If that happens, someone you do trust takes over decisions about your stuff. When you pass away, the trust generally becomes rather unchangeable. While you’re alive, you still pay taxes for things in the trust, but the rates don’t go up just because they’re in there.
2: Irrevocable
An irrevocable living trust means the trust owns the assets, not the person who made it.
The person who made it can’t control it directly as the trustee takes charge. Thus, they give up some control over those assets to someone else.
Once you set up an irrevocable living trust and name beneficiaries, it’s tough to change things. You’ll only be able to make changes in special cases, and sometimes you need court approval. Plus, once you put assets into this trust, you can’t take them back.
An irrevocable living trust offers some great perks. First off, it shields the stuff you put in it (like money or property) from legal issues or people you owe money to.
This is super handy for pros like doctors or lawyers who might face lawsuits.
Another cool thing?
It helps cut down the taxes your family might have to pay when you’re not around anymore. Moreover, when it comes to government programs like Medicare or Medicaid, what’s in the trust doesn’t count against you. So, it’s a win-win for protecting your stuff and saving taxes!
Living Trust — The Advantages and Disadvantages
A living trust helps manage your stuff while you are alive and makes it easier for your family after you’re gone. It’s great for control, but it’s not perfect and has its downsides too.
So, let’s get to know about it.
Advantages
- A living trust brings peace of mind by helping loved ones skip the probate procedure when handling your belongings after you’re gone. It means faster, and much smoother distribution without court fees.
- If you can’t manage the trust’s assets due to incapacity, the trustee steps in, bypassing the courts. Taxes remain steady for assets in a revocable living trust, and it keeps your estate details private.
- Additionally, a living trust shields your estate from creditors and legal disputes.
Disadvantages
- When you put assets into an irrevocable living trust, you give up ownership and control of them. If you own something, like a house, it needs its ownership paperwork changed to belong to the trust. This paperwork change might need some fees.
- Getting a living trust set up might need a lawyer, which costs money too.
- A living trust doesn’t give you tax benefits, except if it’s irrevocable and makes your taxable estate smaller. You still have to pay taxes on the money your assets make and on property taxes.
The Bottom Line
A living trust is a helpful way for folks who want to manage and safeguard their stuff, both while they’re alive and after they’re gone.
When you do create one, you get to call the shots on what happens to your things, skip the complicated legal steps, and ensure your belongings go to the right people without a hassle.
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