First, we should explain why you may want to use a living trust. If you have a will, or think you should use a will, you may be surprised when you learn more.
A revocable living trust is a very useful alternative to a last will, and the avoidance of probate is a major benefit. Why is this something that you may want to avoid? The answer is that it comes with a number of drawbacks that negatively impact the inheritors.
When a will is used, it must be admitted to probate, and the heirs do not receive their inheritances until the estate has been probated and closed by the court. This will typically take about eight months to a year. There are also myriad expenses that pile up during probate, and the money comes out of the pockets of the people who are named in the will.
Another pitfall is the fact that it is a public proceeding, so anyone who is interested can obtain probate records to find out how the assets were distributed. This can cause hard feelings and acrimony in some instances. When a living trust is used instead, the process of probate will not enter the picture, so these drawbacks are completely avoided.
The Anatomy of a Living Trust
If you were to establish a living trust, in legal parlance, you would be called the trustor of the trust. The people who you are going to be leaving money to would be the beneficiaries. Someone has to distribute assets to the beneficiaries, and he or she would be the trustee.
Some individuals harbor misconceptions about trusts. They think that you lose control of all assets that you convey into any type of trust, so they turn away from the idea. It is true that there are some trusts that are irrevocable, and you surrender incidents of ownership when you establish one of these trusts.
However, with a living trust, things are different, because the trust is in fact revocable. You have the power to simply dissolve the trust at any time and take back direct personal possession of the assets. The trustor can also change the terms. For example, you can add a beneficiary or remove a beneficiary if you choose to do so.
You can initially act as the trustee and the beneficiary when you establish a living trust, and you name successors to assume these roles after you pass away. When it comes to the successor trustee, you could empower this individual to administer the trust if you ever become incapacitated.
It would also be possible to name someone else to act as the trustee if you become unable to make sound decisions while you are living, and you can have a different trustee administer the trust after you are gone.
When you think about a trustee, you probably start to envision people who you know who would be capable of handling complicated financial tasks. It is certainly possible to name an individual you know personally to take over the role of trustee after you pass away. However, there are some of reasons why you may want to take pause before you go this route.
For one, a family member or close friend will know the beneficiaries personally. There can be difficult decisions to make at times with regard to following your instructions as they are stated in the trust declaration. To provide an example, you may instruct the trustee to distribute $2000 a month to a certain beneficiary with the stipulation that you would allow for additional distributions in extreme circumstances.
What constitutes an extreme circumstance? There are shades of gray, and the trustee would have to make a determination. It can be hard to say no to someone who you have a personal relationship with, even if it is probably the right thing to do. The anticipated longevity of the trustee who you name is another thing that you should definitely take into consideration.
To avoid conflicts of interest and matters of succession, you could utilize a professional fiduciary like a bank or a trust company to administer the trust. Plus, if you make this choice, you can be certain that the assets will be handled in accordance with strict professional standards, and there will be inherent organizational oversight.
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