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A living trust is a legal arrangement that an individual (known as the grantor) creates to protect their assets and outlines the terms of distribution after their death. This valuable estate planning tool can help family members and beneficiaries avoid a lengthy, complex, and sometimes costly probate process. 

How Living Trusts Work 

Living trusts are crucial estate planning tools. The process begins by establishing a legal document called the living trust during the grantor’s lifetime, which outlines the rules and provisions of the trust. 

Once the living trust is established, the grantor decides which assets to include and transfers the title of those assets to the trust. Upon the grantor’s death, the assets in the trust are released to the beneficiaries based on the outlined trust agreement. 

Assets in a Living Trust 

Assets can only be covered by the terms of a living trust if they are assigned to it. This involves re-titling the ownership to indicate that the trust is the new owner. Various types of assets can be assigned to a trust, including real estate (such as commercial property, homes, and land), financial accounts( such as stocks and bond certificates, checking and savings accounts, and life insurance policies), personal property (like antiques, jewelry, and artwork), and business interests. 

Types of Living Trusts 

Two types of living trusts are revocable and irrevocable trusts. 

In a revocable living trust, the grantor maintains control over the assets placed within the trust and can designate themselves as the trustee. They can change trust rules anytime, including beneficiaries, trustees, assets, or termination. Revocable living trusts are often used to protect the grantor’s assets if he or she becomes incapacitated. In such cases, the successor trustee will make decisions for the grantor. 

On the other hand, an irrevocable living trust cannot be altered, and the trust owns the assets. The grantor cannot be designated as the trustee and relinquishes certain rights of control over the trust. Once an irrevocable living trust is created, the named beneficiaries are set, and the grantor can do little to amend that agreement. Trust provisions can only be changed in certain situations, which may require the court’s approval. Additionally, assets assigned to an irrevocable living trust can never be returned. 

There are benefits to having an irrevocable living trust. For instance, it protects the assets within it from lawsuits and creditors, making it useful for professionals vulnerable to litigation, such as doctors or attorneys. It also reduces the grantor’s taxable estate since the trust, and not they, owns the assets. Moreover, the assets aren’t considered when eligibility and costs for government programs such as Medicare and Medicaid are concerned.

How important is a living trust

Advantages and Disadvantages of a Living Trust 

A living trust is a highly effective estate planning tool that enables you to retain control over your assets while alive and makes it easier for your family to distribute your estate after your death. However, like most things, it has both benefits and drawbacks.

Advantages 

  • Through living trusts, grantors can ensure their loved ones avoid the probate process and settle their estates with peace of mind.
  • The process of distributing assets after one’s death can be made smooth, fast, and cost-effective without the need for any court intervention.
  • If you cannot manage the trust’s assets, your successor trustee will. The tax rate in a revocable living trust does not increase and can be avoided entirely in an irrevocable trust. 
  • Living trusts are valuable tools for keeping estate information confidential. They can effectively protect your privacy when it comes to estate planning.
  • They can shield your assets from potential lawsuits and financial liabilities.

Disadvantages 

  • A grantor surrenders ownership and control of assets in an irrevocable living trust.
  • Any assets with title owned by the grantor, such as real estate, must undergo a legal transfer of ownership.
  • Transferring the ownership of a property or vehicle title requires the payment of registration fees to register any changes made to the title legally.
  • Setting up a living trust may require the assistance of an estate lawyer.
  • Unless it’s irrevocable and reduces the size of the grantor’s taxable estate, a living trust usually doesn’t offer any tax advantages. Taxes still need to be paid on income generated by assets and property.

Living Trust vs. Will 

Living Trust 

Some people create living trusts solely to bypass probate, the legal process through which a court ensures that your debts are paid and your assets are distributed according to your will when you pass away. Your assets are distributed according to state law if you do not have a valid will. Probate can be expensive, time-consuming, and limit privacy and control.

A living trust takes effect immediately after it is created and signed, allowing you to control and protect your assets throughout your lifetime. This control will extend beyond your death to the distribution of assets to your beneficiaries.

However, creating living trusts can be more complicated and costly than making a will. Additionally, they require a notary public. Living trusts cannot designate an executor for a will or name guardians for minor children. Therefore, people with living trusts usually also draw up a will.

Will 

A will is a legal document that outlines your wishes to distribute your assets after you pass away. It also designates guardians for minor children and includes instructions for other matters, such as paying debts, taxes, and funeral arrangements. However, the process of probate, which is court-supervised, is required to handle a will, which can be time-consuming and expensive. Additionally, matters related to a will become public once a probate court is involved.

Creating a will is relatively simple and less expensive than creating a living trust. A witness to your signature is required, but not a notary public. Additionally, a will only goes into effect after you pass away, which means it does not protect your assets if you become physically or mentally incapacitated. This can be a significant concern for many older Americans and their families.

The good news is that there is an alternative to a will – a revocable living trust. It can help you avoid probate and maintain control of your assets while you’re alive, even if you become incapacitated and after you pass away.

Create A Living Trust

Preparing your estate for when you pass away is essential to ensure your family’s future security. Creating a living trust can be a helpful way to accomplish this. If you reside in New Jersey, this guide will provide step-by-step instructions on creating a living trust. 

How to Create a Living Trust in New Jersey

Six steps to create a living trust in New Jersey:

  1. When creating a trust, deciding on the type of trust you want to form is important. If you’re single, you’ll likely want a single trust. However, consider a joint trust if you’re married, which allows you and your partner to put your property into the trust and any jointly owned property, like cars or homes.
  2. It’s crucial to take stock of your property when creating a trust. You can choose what you want to store in the trust, and most of what you own is eligible. However, some exceptions exist, such as 401(k) plans, but you can still name your trust as a beneficiary. It’s also essential to gather all relevant documents, such as deeds and car titles, beforehand.
  3. When creating a trust, you must choose a trustee responsible for distributing your assets to your beneficiaries. If you decide to act as the trustee, you will also need to select a successor trustee who will take over the management of the trust after your death. 
  4. Hire a lawyer to create a trust document to ensure all aspects of the trust are utilized and follow your wishes.
  5. To ensure the validity of the trust document, you need to have it notarized. You should go to a notary public and sign the document to do this.
  6. Transferring your property into the trust is necessary but can be complicated. It is advisable to seek help from a lawyer. 

A skilled estate planning attorney can help you develop an estate plan that aligns with your family’s needs and objectives.

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