A revocable living trust is similar to a testamentary trust, but it is established while you are alive, and you have the power to change it or adjust it as you see fit. It has a trustee that will administer the funds and beneficiaries. In this type of trust, you can be both the trustee and the beneficiary if you so desire. You can also set up a non-revocable living trust, which means that you cannot alter or destroy it after it has been established.
This financial tool has both advantages and disadvantages, and whether you should use it will depend on your goals for the trust. Consider the following pros and cons before you decide whether setting up a living trust is right for your unique situation.
Advantages of a Living Trust
Although living trusts are not used as often today as in the past, there are still some distinct advantages to establishing this type of trust.
- Avoiding probate court. The most common reason that individuals develop a living trust is because they can use it as a will substitute. Upon your death, a living trust will convert into a testamentary trust. Your loved ones will not have to probate anything in your trust, and assets can be distributed much faster and easier according to your instructions provided with the trust.
- Privacy concerns. If you use your living trust as a will substitute, you can avoid potential privacy concerns regarding probating a will. Probating a will is a public proceeding, and many people would like to avoid having their asset distribution in the public eye.
Disadvantages of a Living Trust
Some of the disadvantages of living trust really stem from misunderstanding the purpose and use of this estate planning instrument. For example, some people assume that any and all trusts are useful asset protection tools. This is unfortunately not the case; most living trusts will offer no asset protection. However, if you establish a revocable living trust where you are not the beneficiary, then that may be an asset protection tool. Other disadvantages include:
- Limitations on transfers. Once you move your assets into a trust, you must follow the trust document’s instructions on assignments. You are also not permitted to put joint assets into a one-person trust, including some IRAs and retirement plans.
- No tax avoidance. For the most part, you are unable to completely avoid paying taxes on living trusts. There are ways that you can reduce taxes, but total avoidance is rare.
- Increased contesting period. Most wills have a short contest period of just 30 to 90 days. Living trusts have an increased period of between one and five years, depending on the assets where the trust is located. This increased time means that conflicts can still crop off long after you pass.
Deciding whether a living trust is the right option for you will take the skill and attentions of an estate planning attorney. Contact the Matus Law Group at 732-281-0060.