A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust.
A “living trust” (also called an “inter vivos” trust by lawyers who can’t give up Latin) is simply a trust you create while you’re alive, rather than one that is created at your death under the terms of your will.
Different kinds of living trusts can help you avoid probate, reduce estate taxes or set up long-term property management
Do I need a living trust?
The big advantage to making a living trust is that property left through the trust doesn’t have to detour through probate court before it reaches the people you want to inherit it. In a nutshell, probate is the court-supervised process of paying your debts and distributing your property to the people who inherit it.
The average probate drags on for months before the inheritors get anything. And by that time, there’s less for them to get: In many cases, about 10% of the property has been eaten up by lawyer and court fees.
How does a living trust avoid probate?
Property you transfer into a living trust before your death doesn’t go through probate. The successor trustee — the person you appoint to handle the trust after your death — simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. Probate will take on average 18 months. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.
Is it a hassle to hold property in a living trust?
Making a living trust work for you does require some crucial paperwork. For example, if you want to leave your house through the trust, you must sign a new deed, showing that you now own the house as trustee of your living trust. This paperwork can be tedious, but the hassles are fewer these days because living trusts have become so common
Is a living trust document ever made public, like a will?
No. A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate — inventories of the deceased person’s assets and debts, for example. The terms of a living trust, however, need not be made public
Does a living trust protect property from creditors?
No. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.
Generally, after your death, all property you owned — including assets held in a living trust — is subject to your lawful debts. For example, if your house is held in trust and passes to your children at your death, a creditor could demand that they pay the debt, up to the value of the house. Ownership of real estate is always a matter of public record, so creditors can always find out who inherited real estate. It can be more difficult for creditors to know who inherits other property, however (because a trust document, unlike a will, is not a matter of public record), and they may not bother tracking it down.
On the other hand, probate can also offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they’re out of luck forever.
If I make a living trust, do I still need a will?
Yes, you do — and here’s why: A pour-over Will is created to catch any property which had been (intentionally or inadvertently) left out of the Trust at the time of your death. By the terms of a pour-over Will, the property or assets it catches id distributed to the existing Trust. Whenever a Trust is used, it is essential to also have a pour-over Will to catch your property which was not held by the Trust, not held in joint-tenancy, or subject to other contractual agreements at the time of your death.
Can a living trust reduce estate taxes?
A simple probate-avoidance living trust has no effect on taxes. More complicated living trusts, however, can greatly reduce the federal estate tax bill for people who own a lot of valuable assets.
One tax-saving living trust is designed primarily for married couples with children. It’s commonly called an AB trust, though it goes by many other names, including “credit shelter trust,” “exemption trust,” “marital life estate trust” and “marital bypass trust.” Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save up to hundreds of thousands of dollars in estate taxes, money that will be passed on to the couple’s final inheritors.