What Is a Living Trust and Do I Need One?

Key Points – What Is a Living Trust and Do I Need One?

A Living Trust Is an Extension of You
Properly Titling Your Assets and Beneficiaries within Your Trust
How Are Trusts Typically Structured?
Main Trustees, Co-Trustees, Successor Trustees, and Corporate Trustees
6 Minutes to Read | 23 Minutes to Watch

What Is a Living Trust?

How could a living trust be utilized as a key part of your personal estate planning strategy? That’s something that’s important to think about as you’re figuring out how to manage your assets—both while you’re living and after you die. We’re going to review the components of a living trust to help determine if you need one as a part of your estate plan.

Components of a Living Trust

At a base level, think of a living trust as being an extension of you. The main goal of a living trust is to carry out your wishes in the event that you become incapacitated or pass away. A living trust (also referred to as a revocable trust) comes with the trust itself, a will, living will, health care directive, and powers of attorney for finance and health care.

Is a Will Not Enough?

Notice that a will was included as a part of a living trust. If you have a will, you might be asking yourself, “Is a will not enough? What does a living trust offer that’s not included in a will?” Those are two good questions, so let’s address them.

Having a will as a part of your estate plan is crucial but taking it a step further by setting up a living trust can help solidify your estate plan. A living trust is the only way you can have a substantial level of control—outside of outright distribution—of your legacy. Setting up a living trust also ensures that your assets will avoid probate and transfer privately to your beneficiaries. If you just have a simple will, your assets are guaranteed to go through probate.

Properly Titling Your Assets and Beneficiaries within Your Trust

One common estate planning mistake is thinking that just because you’ve built a living trust that everything is done. The last pieces of putting a trust in place are to properly title all non-beneficiary assets into the trust and properly title beneficiaries on all beneficiary assets in the trust. Otherwise, the trust is just an expensive piece of paper.

There are a couple of specific pitfalls when it comes to proper titling that we want to note. One is that you need to be aware of any potential tax consequences before naming the trust as a beneficiary. There are some instances in which you don’t want the trust as a beneficiary. Another one is to not name your estate as a beneficiary because that will cause your estate to go through probate even if you have a trust.

You need to be 100% transparent with everything that you own because it’s your responsibility to retitle the assets in the trust. Sometimes people will spend a lot of time setting up the trust with their attorney but never fund it. While that responsibility falls on you, we strongly encourage you to have your CFP® Professional lead the charge with building it with you and your attorney. That’s because your CFP® Professional is the person who has worked with you to build your overall financial plan that centered around your personal needs, goals, and situation.

Specific Situations for Why Someone Would Need a Living Trust

Everyone is going to have their own desire when it comes to how they want their affairs handled if they die or become incapacitated, so having a living trust can be beneficial in those situations.

Special Needs Trust

For example, what if you’re a parent and you have a child with special needs. That parent should strongly consider setting up a special needs trust so that their child will continue to receive the financial and health support they need once you pass away or if you become incapacitated.

Do You Trust Your Children and/or Grandchildren?

Living trusts are commonly built with a laddered-style distribution strategy. Maybe you want to give your legacy to your kids and/or grandkids, but you have concerns about them spending your hard-earned financial wealth responsibly. With the laddered-style structure, you can give your legacy to them at certain stages of your life. The same thing applies if you’re giving to charity via a living trust. You can do it over time if you don’t want to do an outright distribution.

Main Trustees, Co-Trustees, Successor Trustees, and Corporate Trustees

When you set up a living trust, you’ll typically have a main trustee or co-trustees. Let’s say that you’re married, and you and your spouse have a living trust. You and your spouse would be co-trustees. That means that you and your spouse would need to agree when making decisions related to the living trust.

And then there are successor trustees. They come into play if the trustee becomes incapacitated or dies. For example, if you were to die in a car accident that also left your spouse in a coma, the successor trustee would step in and is bound in a fiduciary capacity to execute the trustee’s wishes that are written in the trust. Many people don’t realize how critical the role of a successor trustee is, but they have a huge responsibility.

Avoiding Big Family Arguments

Let’s say that you and your spouse have three children and you’ve named one of them the successor trustee. Again, the successor trustee is obligated to carry out your wishes that are written in the trust. It’s important that the other two children are aware of your wishes so that they don’t have animosity toward the successor trustee.

Does the thought of your children being at odds with each other in this kind of scenario makes you uneasy? Well, there’s another successor trustee option to consider. To avoid family in-fighting, you can name a corporate trustee as your successor trustee. That corporate trustee would be a trust company that carries out the wishes in your trust without any bias.

The downside of that, though, is that a corporate trustee will charge a fee. According to Trust & Will, the normal fee for using a corporate trustee is between 1% and 1.5% if your estate’s value.₁ But the percentage of the fee tends to be lower for larger estates.

Remarriage Protection and Beneficiary Divorce Protection

Remarriage and divorce are also two critical considerations when it comes to estate planning. The protection that trusts can offer for surviving spouses and children going through divorce can be very impactful. Let’s start with discussing remarriage protection for surviving spouses.

Did you know that within two years after becoming widowed that more than 60% of men get remarried or become romantically involved with a new partner?₂ On the flip side, less than 20% of women remarry or have a significant other within two years of being widowed. If you pass away before your spouse and they decide to get remarried, would you want you and your spouse’s assets to be protected from their new partner and new partner’s family? In most cases, the answer to that question is a resounding yes. Having a living trust is crucial so that you still have control to protect your surviving spouse.

The same idea applies with beneficiary divorce protection. Do you have a son-in-law or daughter-in-law that you just can’t stand even if they’re married to someone you love? Well, if your son or daughter does get a divorce, you can include protection in your trust for them from their ex-spouse so that they keep 100% of your inheritance.

So, Do You Think You Need a Living Trust?

The bottom line with a living trust is to remember to think of it as being an extension of you if you pass away or become incapacitated to ensure that your wishes are carried out as you intended. As you’re thinking about whether to set up a living trust, make sure to download our Estate Planning Guide to review other important components of estate planning.

Estate Planning Guide

At Modern Wealth, our team of CFP® professionals, estate planning experts, CPAs, CFAs, and insurance specialists are equipped to help you understand the nuances of setting up a living trust and building one that’s designed around your special goals. A thorough and up-to-date estate plan, which includes a living trust, is pivotal as you’re protecting your legacy and ensuring your wishes are carried out as you intended.

If you have any questions about how to set up a living trust, the components of a trust, or whether you need one, start a conversation with our team below to see how a living trust could be a part of your personalized financial plan.

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Setting up a living trust can go a long way toward alleviating any financial stress that stems from your estate planning needs. We look forward to learning about your legacy goals and determining how a living trust could help you achieve them.

Resources Mentioned in This Article

Downloads

Estate Planning Guide

Other Sources

[1] https://trustandwill.com/learn/trustee-fees

[2] https://georgiabulletin.org/commentary/2022/01/the-widowed-and-remarriage/

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.