As part of the financial planning process, we discuss the pros and cons of trusts — and your options in creating them: whether they are revocable or irrevocable, how much control a trust has, and what the long-term goal of a trust is. The term “trust” can be confusing for many regarding an estate plan, as there are many different types of trusts. Numerous estate planning tools can help make your estate run more smoothly while you are alive — and after your death.
People use trusts to keep control of their money and property and to designate who receives money and property when they die. A living trust is ineffective until the person who creates the trust puts their money or assets into it. Then, the trustee has authority over the assets.
There are three main roles under trusts:
• Grantor, Settlor or Trustor: the person who makes the trust.
• Trustee: the person who makes decisions about property and money in the trust. In a revocable trust, the person who made the trust (grantor) typically also is the trustee. If it is a joint trust, there can be co-trustees, such as a spouse.
• Beneficiaries: the people who receive money or property from the trust. The person who makes the revocable trust could also be the beneficiary while they are alive. After the grantor passes, the people who receive money or benefits from that trust are the residual beneficiaries.
A living trust can also be called a revocable trust or revocable living trust. A revocable trust can be amended or terminated at any time, but upon the death of one or both creators of the trust, it can then become irrevocable. Think of this type of trust as an extension of yourself (or your spouse if it is a joint trust).
There is no separate tax identification number and there are no tax benefits. You are still filing these assets as if they are owned in a regular joint account. You may be able to transfer most types of assets — such as your home, bank accounts, brokerage accounts and investment properties — into a revocable living trust.
The trust owns the property in title, but you maintain control of the assets and in most cases, you can use the trust property in the same way you had before transferring it into the trust.
What are the main reasons to use a revocable living trust?
There are two main benefits of utilizing a revocable living trust: to avoid or reduce the probate estate and to control the distribution of your assets.
Probate is the court-supervised process of administering your assets after your death. The process can be time-consuming and expensive, and the assets could remain tied up in court with your heirs not having access to funds in a timely manner. (During the pandemic, for example, probate courts fell significantly behind schedule, and assets were tied up for longer than expected.)
As your will goes through the probate process, it is made public. Anyone could go to the courthouse and read the will to see who gets your assets. If you put your assets in a revocable trust, however, your assets and beneficiaries remain private.
When assets go through probate, the court ultimately decides who gets what assets. If your assets are held in a living trust, however, you can avoid probate and control the timing and distribution of the assets. When you pass away, the person you appoint successor trustee will be legally responsible for distributing the assets according to the terms you specify in the trust document.
What are other considerations of a living trust?
• There are costs associated with setting up a living trust, such as paying an estate attorney to draft the legal documents. Another potential cost is changing ownership of certain assets, such as real estate. If you are moving your home into the revocable trust, a deed must be filed, and that may cost money as well.
• There are typically no income tax benefits associated with a living trust. Even though the assets have been transferred into a trust, you still will be subject to income taxes generated by the trust.
• A living trust is only one part of an overall estate plan. You still will need to take precautions such as preparing your last will and testament, establishing power of attorney, outlining medical directives, creating a living will and assigning HIPPA authorization.
Living trusts are among the most flexible and popular estate-planning vehicles. They are revocable, and you can change them as often as you would like. They can preserve your privacy, allowing the estate to avoid the probate process and enabling you to control how your assets will be distributed after your death — very similar to your retirement accounts.
Please let us know if you have any questions about revocable living trusts. We are always happy to discuss the pros and cons and help you decide if they are a sensible alternative for you.
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
Sources: Forbes, JP Morgan
This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.
Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.
Past performance is not a guarantee of future results.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.
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