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Wednesday, July 17, 2013

The pros and cons of living trusts

Living trusts are revocable, so terms can be reversed

While living trusts have become quite popular in recent years, misconceptions about this estate planning tool are widespread. Under the right circumstances, living trusts can be beneficial to both you and your heirs; this article will explain the concept of living trusts, and examine the advantages and disadvantages of using one as part of your estate planning.

What is a living trust?

As its name implies, a living trust is set up while you are still alive. It is a "revocable" trust, which means the person creating the trust has the authority to change or cancel the terms of the trust at any point during their lifetime. Once this person, called the grantor, dies, the trust becomes irrevocable and the assets in the trust are distributed according to the defined terms.

Avoiding probate 


Most people set up a living trust to avoid the time and cost involved in probate proceedings. Living trusts allow you to sidestep this process because the property held by the trust is technically owned by the trustee, not the grantor; typically only property owned individually by a deceased person goes through probate.

Privacy and control

Some individuals create living trusts due to privacy concerns. Probate proceedings are a matter of public record. If circumstances exist where you may not want your beneficiaries disclosed publicly, the more private nature of a trust might suit your needs. 

A living trust also gives a unique degree of control compared to typical trusts. While the assets are legally the property of the trust, the grantor is free to use these assets during his or her lifetime.

A few pitfalls

Even though living trusts clearly have their advantages, there are a few downsides worthy of consideration. Many people believe that living trusts can save on estate taxes and income taxes; in reality, they save on neither. Assets held in a living trust are not shielded from creditors. Also, creating and executing a living trust is neither inexpensive nor simple. The attorney's fees are significantly higher than those for a typical will. In terms of administrative tasks and paperwork, living trusts can actually be more cumbersome to process than the average probate proceeding.

Living trusts aren't for everybody. Although they offer privacy, control, and shelter from probate, many individuals with relatively simple financial situations will find a well-written will sufficient to meet their needs. Certain assets, such as IRAs and life insurance proceedings, are not even subject to probate proceedings; in these cases, the benefit of avoiding probate is lost. The best course of action is to consult a financial adviser to examine your assets, and see if a living trust is the right estate planning vehicle for you and your hairs. 

About the author: Derek is currently blogging for Faloni & Associates, LLC, an estate planning company that provides help in real estate, personal injury, and living trust in New Jersey. Derek enjoys blogging about multiple finance topics and enjoys helping people with making smart decisions with their money.

Image license: Lusi; RGBStock.com