What Is A Living Trust?

A living trust is a legal document created to hold your assets and dictate how they will be used during your life and disposed of after your death. This is different from a will in that a will only deals with the disposition of your assets after death.

A living trust allows you to maintain total control of your assets until the time you need assistance from a successor trustee. The tax identification number of a living trust is the same as the owner’s social security number, so there is no separate tax return.

Why Create A Living Trust?

A living trust accomplishes two important things:

• It allows for orderly transition of your financial management to your future financial caretaker without resorting to a power of attorney document.
• Assets owned by the trust avoid probate, so transfer of your assets is a private affair and does not go through the courts. This will keep estate costs down.

Who Should Have A Living Trust?

People with very simple assets such as their house, retirement plans, and small bank accounts are fine without a living trust as long as they have a valid power of attorney in place so their future financial caretaker can easily take over their duties.

People with more complicated asset structures will benefit from a living trust the most – taxable brokerage accounts, large bank accounts, real estate other than homestead, and collections are best placed in a trust.

What Are The Different Types Of Trusts?

Revocable Living Trust

• A trust that can be altered, amended, or revoked by the grantor (the person who creates the trust) at any time during their lifetime.
• Features:
• The grantor retains control over the assets.
• Provides flexibility to make changes as circumstances evolve.
• Avoids probate upon the grantor's death.
• Assets are still considered part of the grantor’s estate for tax purposes.
• Best For: People who want control over their assets and flexibility during their lifetime.

Irrevocable Living Trust

• A trust that cannot be changed or revoked once established, except under specific legal circumstances.
• Features:
• The grantor gives up control of the assets placed in the trust.
• Offers protection from creditors and lawsuits.
• May reduce estate taxes since the assets are no longer part of the grantor’s estate.
• Best For: High-net-worth individuals looking to minimize taxes, protect assets, or qualify for Medicaid or other benefits.

Special Needs Trust

• A trust created to provide for a beneficiary with disabilities without affecting their eligibility for government benefits like Medicaid or Supplemental Security Income (SSI).
• Features:
• Funds can be used for medical care, education, and other expenses not covered by government benefits.
• Maintains the beneficiary's eligibility for public assistance.
• Best For: Families with dependents who have special needs.

Charitable Trust

• A trust designed to benefit a charitable organization or cause while also providing tax benefits to the grantor or beneficiaries.
• Features:
• Can provide income to the grantor or beneficiaries during their lifetime.
• Remaining assets go to the designated charity after the trust ends.
• Best For: Philanthropic individuals who want to support causes they care about while reducing estate or income taxes.

Medicaid Trust

• An irrevocable trust designed to help the grantor qualify for Medicaid while preserving assets for heirs.
• Features:
• Assets transferred to the trust are no longer counted for Medicaid eligibility.
• Typically requires a "look-back period" during which assets transferred into the trust may still affect eligibility.
• Best For: Elderly individuals seeking long-term care while protecting assets for their family.

Funding A Trust

The most important part of having a trust is to make certain it is funded correctly. Accounts and deeds to property must be retitled in the name of the trust. Collections should have paperwork created that directs the trust as owner of the collection. If the trust is not properly funded, assets left out of the trust will go through probate which can be time-consuming and costly. Consult a reputable estate planning attorney to determine if a living trust is right for you.