The living trust is an planning tool that is more effective than a simple will. We will share some of the advantages here, and we will also look at the way living trusts are taxed.
Flexibility and Efficient Estate Administration
When you have a revocable living trust, you can be the trustee while you are alive and well so you would retain complete control of the assets.
For example, if you transfer your home into the trust, nothing would change. You would still live in the home as usual and enjoy all the same rights and responsibilities. If you ever wanted to sell the house, you would be the trustee with unfettered access so you could put it on the market.
After the trust has been created, you can change the terms, including the beneficiary and successor trustee designations. You can also convey property into the trust at any time.
You can dissolve a revocable trust at any time and take back direct personal possession of the property if you choose to do so.
After your death, the trustee would be able to distribute assets to the beneficiaries in accordance with your wishes outside of probate. This is a rather time-consuming legal process that would be necessary if you use a will as your asset transfer vehicle.
Asset Protection After Your Passing
Assets in a living trust would not be protected from legal actions while you are living because you would not be surrendering control. However, a living trust can provide asset protection for a beneficiary.
Let’s say that you are going to be leaving an inheritance to your grandson, and he is a young adult with no proven ability to manage a large amount of money. You could make him the beneficiary of a living trust with a spendthrift clause.
After you are gone, the trust would become irrevocable. Your grandson would not be able to directly access the principal, and the same arrangement would apply to your grandson’s creditors.
When you are establishing the trust, you can leave instructions with regard to the way you want the assets to be distributed. For instance, you may want to provide a certain amount each month for a prescribed number of years until your grandson is old enough to receive the rest in a lump sum.
Nobody wants to think about this unpleasant subject, but people that reach an advanced age (as well as some younger people) often become unable to handle their own financial affairs. To account for this, you can name a disability trustee to assume the role in the event of your incapacity.
It can be the same individual or professional fiduciary that will act as the trustee after you are gone, but this is not required.
Income Taxes on Trust Distributions
After your death, distributions of the principal to the beneficiaries are not taxable because you already paid taxes on your income.
That’s the good news, but the bad news is that distributions of interest income earned after your death would be subject to taxation. The beneficiaries would have to report the income, and if the interest is not distributed, the trust would be required to pay the taxes. The same applies to capital gains if the trust or the beneficiaries sell property that went up in value after your death. (This is true whether you have a trust or not.)
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A living trust is one of multiple different tools that can be used to facilitate asset transfers. Each situation is different so there is no universal, one-size-fits-all approach that is right for everyone.
You should discuss all of your options with a licensed attorney so you can come away with a custom crafted plan that ideally suits your needs. If you are ready to take that step, we are here to help.
Our office in Charlotte, North Carolina or Huntersville, North Carolina can be reached at 704-944-3245, and you can schedule an appointment in Ashland, Kentucky if you call us at 606-324-5516 or in Florence, Kentucky if you call us at 859-372-6655. We also have a contact form that you can fill out if you would prefer to send us a message.