What Is a Living Trust and How Does It Work?

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A Living Trust is a legal document in which you name a Trustee, usually yourself, to manage assets (stocks, bonds, real estate, personal effects, etc.) which you re-title in your name as Trustee. Re-titling assets in your name as Trustee does not cause you to lose control of the assets. You can still buy, sell, trade, spend or do anything with these assets you choose. You can also revoke the Trust or change its terms at any time. There are several significant advantages in utilizing a Living Trust.

Avoid Lifetime Probate. If you become incapacitated, the Trust provides for the automatic appointment of a Successor Trustee you have chosen – not the Probate Court. Your Successor Trustee is required to use and manage the Trust assets as you direct in the Trust, without them going through the Probate Court.

Avoid Death Probate. Trust assets, unlike assets titled in your name individually, do not go through the Probate Court. This is true in every state in the U.S. As a result, your loved ones avoid the attorneys fees and costs (estimated at about 5-10% of an estate’s value), as well as the delays and loss of privacy associated with the probate process.

Maintain Control of Your Assets & Provide for Loved Ones. A Living Trust enables you to control your assets even after your death. Unlike a Will, you can direct not only who receives your assets, but when and under what conditions they will receive them (upon reaching a certain age, completing school, etc.).

Avoid Estate Taxes. Living Trusts are the best way to eliminate or at least reduce estate tax liability for estates with a value of $1,000,000* or greater. Estate assets above the $1,000,000* threshold are subject to significant estate taxes at rates of roughly 50%. When determining the value of an estate, all assets are counted, including real property, retirement benefits, personal property, jointly held property and even insurance paid on account of your death. A Living Trust can eliminate estate taxes for married couples by fully utilizing two estate tax “breaks” the government allows, called the Unified Credit & the Unlimited Marital Deduction.

Every U.S. resident is allowed a Unified Credit that protects the first $1,000,000* of their assets from estate tax. In addition to their Unified Credit, every married U.S. citizen has the benefit of a Unlimited Marital Deduction which allows them to receive an unlimited amount of assets from their spouse estate tax free. However, the Unlimited Marital Deduction only postpones taxation of these assets. The assets become a part of the estate of the surviving spouse, and are taxed when that spouse dies. Unless a Living Trust is used, all assets pass to the surviving spouse under the Unlimited Marital Deduction and the Unified Credit of the first spouse is wasted when the first spouse dies. This can be avoided by using a Living Trust, which preserves the Unified Credit of the first spouse to die by setting aside up to $1,000,000* for the support and maintenance of the surviving spouse in a separate sub-trust, called a Credit Shelter Trust. These assets do not pass to the surviving spouse under the Unlimited Marital Deduction, and, therefore, they are not taxed when the second spouse dies. If a Living Trust is not used, every dollar above $1,000,000* is taxed at rates of approximately 50%. Using a Living Trust, a married couple who are both U.S. Citizens can double their protection to $2,000,000* while still retaining lifetime use and control of their assets. Without a Living Trust in place, this result is impossible. The savings for a married couple is significant. For example, if a married couple with assets of $2,000,000* fails to use a Living Trust, the estate of the last spouse to die would needlessly pay roughly $450,000 in estate taxes. If the couple had utilized a Living Trust, no estate taxes would be due. All of these advantages make a Living Trust an attractive Estate Planning option for many people.

*(Note: This $1,000,000 figure – $2,000,000 for married couples with trust based estate plans – is based on the estate tax exemption amount allowed for deaths occurring after January 1, 2011. For deaths occuring before that date the exemption amount is higher. For a more detailed explanation of the rules on estate tax exemptions see our article “Making Sense Out of Estate Tax Exemption Nonsense.”)

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