Living trusts are traditionally thought of as tools for the wealthy, but they have some advantages that can be useful to other individuals. This can include those who may want to set up a special needs trust for their children. You may be able to benefit from a living trust even if your net worth doesn't qualify you as affluent.
What Is a Living Trust?
A living trust is a legal document that an attorney creates and that you as trustor (also known as grantor or settlor) sign. You then transfer your assets out of your name as an individual and into the name of the trust.
As the grantor of a living trust, you can also act as the trustee of the trust and control the assets within it if the trust is revocable. Living trusts are usually revocable. As the grantor, you can change or even close your trust at any time. You can choose a successor trustee to take over after your death or incapacitation, an individual or corporation that will manage your trust assets and adhere to all the directions you've set forth in the trust document.
The individuals you choose to benefit from your assets after you've passed away are called the trust beneficiaries.
Who Should Have a Living Trust?
Living trusts aren't advantageous or necessary for everyone, but they have certain uses that can make having one worthwhile. Your successor trustee will take over managing your trust on your behalf if you become incapacitated and are no longer able to handle your own financial affairs. A living trust provides a way to control how and when your assets are distributed after your death if you have a child with special needs, or one who handles money poorly.
Advantages of a Living Trust
Some advantages of a living trust, such as estate tax savings, are more beneficial to those individuals who have a high net worth, generally accepted as $1 million or more in liquid assets. This doesn't include real estate, business, valuable collections or other assets not easily converted to cash. But only irrevocable trusts provide this protection.
Forming an irrevocable trust means forever stepping aside after you transfer your assets into it. You can't act as trustee. You no longer own the assets, although you can name yourself as a beneficiary. The assets won't contribute to your estate's value for estate tax purposes because they're not yours any longer.
Other living trust characteristics can be advantageous to anyone, such as avoiding probate court delays, providing for minor children, controlling assets after death and maintaining privacy.
Qualifications for Creating a Living Trust
Your individual net worth is a consideration for a living trust primarily if you want to employ a corporate trustee, such as a bank, trust company or investment firm. These entities require a minimum balance before they'll agree to serve as trustee.
Some corporate trustees offer "small" trust products that limit the types of investments that can be held and the class of beneficiary you choose, such as your estate or a single beneficiary.
The required minimum balance is usually $100,000. It's determined based on the liquid assets held in your trust rather than your net worth. Your net worth may not have to be as significant if you're planning on naming an individual as the trustee, and it wouldn't be a factor at all if you form a revocable trust and act as your own trustee.
Calculating Your Minimum Net Worth
The best method to use to determine the minimum net worth you should have to benefit from a living trust is to check your state's "small estate" laws. Each state determines the net worth that can pass to your beneficiaries by means of an affidavit versus being handled by a probate court. Small estate laws vary from state to state. The small estate maximum amount is $100,000 in Washington State as of 2022, while it's $40,000 in Washington D.C.
- AmericanBar.Org: Revocable Trusts
- HG.Org: How to Select a Trustee, Executor and Agent
- HG.Org: What Advantages Do Living Trusts Provide?
- CNN: Ultimate guide to retirement: Do I need a trust?
- WashingtonLawHelp.Org: Claiming the Personal Property of Someone Who Has Died
- DCCourts.Gov: Small Estates (SEB) FAQs
Mary K. Hogan currently holds a Certified Business Analysis Professional certification from the International Institute of Business Analysis and has held the designation of certified trust and financial analyst. Hogan has been a contributing writer online since 2009 and is currently working on her third children's book.