Before we address the question that serves as the title of this blog post, we should explain some reasons why you may want to use a living trust as an alternative to a last will. There are limitations when you use a will as your primary vehicle of asset transfer. One of them is the fact that you have to provide lump sum inheritances to your heirs. If you have someone in the family that is not good at handling money, this can cause a problem.
Another thing about a last will that is not positive for the inheritors is the probate process. The executor will take care of the hands-on estate administration tasks, and the probate court will provide supervision. Probate exists to give creditors a chance to come forward seeking satisfaction, and interested parties have the right to challenge the validity of the will during probate.
One of the negatives that goes along with probate is the consumption of time. Even if there are no particular complications, it will take about nine months to a year for probate to run its course. Another drawback is the fact that probate is not free. There are court costs, legal fees, the executor’s remuneration, commissions, appraisal charges, and other incidentals that can reduce the amount of the inheritances that the heirs will receive.
Another problem with probate is the loss of privacy. You may have read about the estate planning details of famous people that passed away. Have you ever wondered why this information is available to the general public? The answer is that probate is a public proceeding, and anyone that is interested can access probate records to find out how a deceased person distributed his or her resources.
With a living trust, all of these drawbacks are avoided. Assets in a living trust can be distributed outside of the costly and time-consuming probate process. As a result, all of these pitfalls are avoided.
The Anatomy of a Living Trust
When you create a living trust, you are called the grantor or settlor of the trust. The trustee is the individual or entity that administers the trust, and the beneficiaries can receive distributions from the trust. While you are alive and well, you can act as the trustee and the beneficiary, so you do not lose control of assets that you think the trust. Plus, this is a revocable trust, so you can dissolve the trust entirely if you ever choose to do so.
You would be establishing the trust to serve as an estate planning tool, so you have to account for things that will happen after you pass away. To this end, you name a successor trustee to handle the trust administration tasks after you are gone. It would be possible to empower someone that you know, but there are professional fiduciaries like banks and trust companies that understand exactly how to administer a revocable living trust.
The heirs that you want to leave inheritances to would be the beneficiaries of the trust. As we touched upon previously, if you use a will, you have to allow for lump sum inheritance distributions. Things are entirely different with a revocable living trust.
To explain by way of example, let’s say that your son is often in financial trouble. Money consistently slips through his hands very quickly, and you are concerned about this when you are planning your estate. You have conveyed an apartment building into the living trust, and it earns $5000 in profit every month. Under these circumstances, you could instruct the trustee to distribute $5000 to your son on a monthly basis.
Another benefit that you gain when you use a revocable living trust instead of a last will is the ability to account for incapacity. A significant percentage of elders become unable to handle their own affairs at some point in time, so you should prepare for this eventuality in advance.
When you have a living trust, you can name a disability trustee. It can be the same person or entity that will manage the trust after your passing, or it can be someone else; the choice is yours.
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