What Is a Living Trust?
A living trust is a legal document that, like a will, contains your instructions for what you want to happen to your assets when you die. However, unlike a will, assets can transfer to a beneficiary while avoiding probate.
A living trust is a legal contract established during an individual’s lifetime. It is a way to manage and protect assets that will ultimately benefit your named beneficiaries after you pass away. A designated person, the trustee, is charged with managing the individual’s assets for the benefit of the eventual beneficiary. A living trust is intended to facilitate the transfer of the trust creator’s or settlor’s assets while avoiding the frequently complex and costly legal procedure of probate. A trustee is designated in living trust agreements as the person who has possession and control of the assets and property that flow into the trust.
Living Trust – A Closer Look
A trustee manages a living trust and has a fiduciary duty to administer the trust responsibly. The trustee looks out for the best interests of the trust’s beneficiary or beneficiaries specified by the trust’s creator. The trust founder is also known as the settlor or grantor. When the settlor dies, the assets are distributed to the beneficiaries in accordance with the grantor’s desires. These specific instructions are described in the original trust agreement. A living trust, unlike a will, is in effect while the settlor is alive. As a result, it does not have to go through probate or the courts to reach its intended beneficiaries when the settlor dies or becomes disabled.
Do living trusts and a will do the same thing?
No, not quite. A will can include language that establishes a testamentary trust to save estate taxes, care for minors, and so on. However, because it is part of your will, this trust will not take effect until after you die and your will is probated. As a result, it does not avoid probate and offers no protection in the event of incapacity.
With a living trust, do I still need a will?
A will is still a good idea, even if you have already established a living trust. A will serves as a safety net in the event that you forget to transfer an asset to your trust. When you die, your will “catch” the forgotten asset and transfer it to your trust. However, the asset may need to go through probate before being dispersed as part of your overall living trust strategy. In addition, if you have minor children, a guardian must be appointed in the will. (Source: estateplanning.com)
What’s So Bad About Probate?
Probate is a legal process that occurs after you die. The court steps in to ensure that your debts are paid and your assets are distributed according to your will. In the absence of a legal will, your assets are dispersed in accordance with state law.
- Expense – Before your assets may be fully transferred to your heirs, legal fees, executor fees, and other expenditures must be paid. If you hold property in another state, your family may have to go through multiple probates, each according to the laws of that state. These expenses can vary greatly. It’s a good idea to set your house in order now rather than leave it to the courts.
- Wasted time – Usually between nine months and two years, but often much longer. Assets are normally frozen for a portion of this period so that an accurate inventory can be taken. Nothing can be distributed or sold without the approval of the court and/or the executor. If your family requires financial assistance, they must apply for a living allowance, which may be denied.
- No privacy – Because probate is a public proceeding, any interested person can know what you possessed. Further, who owed you, who will receive your assets, and when they will receive them. Disgruntled heirs are essentially invited to contest your will. Your family may be subjected to unscrupulous solicitors as a result of the procedure.
- Loss of control. The probate process ultimately dictates how much money is spent, how long it takes, and what information is made public. (Source: ibid)
How does a living trust avoid probate?
When you create a living trust, you move assets from your name to the name of the trust that you control. For example, John and Mary Smith, husband, and wife to John and Mary Smith, trustees under trust dated (month/day/year). Once signed and dated, you no longer own anything legally – everything now belongs to your trust. So the courts have no authority over you if you die or become incompetent. The principle is straightforward, yet it can keep you and your family out of court.
Living Trust – Types
Living trusts can be irrevocable or revocable.
- Revocable – With a living revocable trust, the trust settlor can name himself or herself as trustee and still control the trust’s assets. However, because the assets in the trust remain a part of the trust settlor’s estate, the individual may still be liable for estate taxes. This is if the estate is worth more than the estate tax exemption at the time of death. The trust settlor may also update or amend trust regulations at any time. This means that the trust settlor is free to modify the beneficiaries or cancel the trust entirely.
- Irrevocable – The creator or settlor of an irrevocable living trust gives up certain control rights over the trust. The trustee effectively becomes the legal owner. However, the individual’s taxable estate is usually reduced. The named beneficiaries are set once the trust agreement for an irrevocable living trust is made. Once established, the settlor has minimal ability to change the arrangement.
Asset Assignment Within a Living Trust
A living trust can be named as the beneficiary of assets. Even assets that would ordinarily pass immediately to the named beneficiary regardless of what is written in a will. For example, employer-sponsored retirement accounts like 401(K)s, individual retirement accounts (IRAs), life insurance policies, and specific bank accounts like Payable on Death (POD) accounts. Living trusts can include trust accounts created during the settlor’s lifetime and not established upon death as specified in a final will and testament.
Transferring assets into a living trust
Your lawyer, trust officer, financial advisor, and insurance agent can assist you. Titles on real estate, stocks, CDs, bank accounts, investments, insurance, and other assets with titles are typically changed. Most living trusts include jewelry, clothing, art, furniture, and other non-titled valuables. Some beneficiary designations should also be shifted to your trust. For example, life insurance policies. This is so that the court does not have power over them if a beneficiary is incapacitated or no longer alive when you die.
Frequently Asked Questions
Does my trust end when I die?
A trust, unlike a will, does not have to die with you. Assets can remain in your trust, administered by the trustee you choose until your beneficiaries reach the age(s) at which you wish them to inherit. Your trust can last for a longer period of time to provide for a loved one with specific needs or to protect assets from creditors, spouses, and future death taxes.
Can a living trust save on estate taxes?
If the net value of your estate when you die exceeds the “exempt” amount at the time, your estate must pay federal estate taxes. Additionally, your state may levy a death or inheritance tax as well. However, if you are married, your living trust can include a provision that allows you and your spouse to use both of your exemptions. This alone can save your loved ones a significant amount of money.
Do I lose control of the assets in my living trust?
You can retain complete control. As trustee of your trust, you have the authority to do anything you could previously. For example, buy and sell assets, change, or even cancel your trust. That is why it is known as a revocable living trust. You even use the same tax forms. The only thing that changes are the names on the titles.
GAAS or Generally Accepted Auditing Standards are guidelines auditors generally follow when auditing corporate books and financial records.
Generally Accepted Auditing Standards (GAAS) are a set of methodical rules. They are used by auditors while conducting audits on the financial records of corporations and publicly traded firms. GAAS standardizes the correctness, consistency, and veracity of auditors’ actions and reports. GAAS was developed by the American Institute of Certified Public Accountants (AICPA) Auditing Standards Board (ASB). Generally Accepted Accounting Principles (GAAP) specify the accounting rules that corporations must adhere to in preparing their financials. Conversely, GAAS Auditing Standards specify the standards and guidelines to which auditors must adhere.