More and more Americans are setting up living trusts to protect their assets during their lifetimes while making sure those assets are distributed to their beneficiaries according to their wishes when they pass. Living trusts have a variety of benefits, such as reducing headaches for heirs after the passing of a family member or other person leaving them assets and reducing some tax liabilities. Reviewing the basics of a trust and how to set up a trust fund will help you have more educated discussions with any attorney you hire.
What Is a Living Trust?
A living trust is one that exists while you're alive as opposed to one that you create under the terms of your will. It holds the assets you want to leave to benefit individuals, charities or other organizations after you pass, explains legal website Nolo. You place assets into the trust that can then benefit individuals or groups. They don't have to wait until your death. Your gifts can begin immediately. You can personally receive interest from the assets placed in the trust.
Alternatively, you can create a trust that earns interest on the assets while safeguarding them and only distributes them to the beneficiaries on your passing. You're referred to as the grantor when you create a trust under your direction with your assets.
What Are the Benefits?
Living trusts allow you to protect your assets, designate how they will be used and can reduce your tax burden depending on what type of trust you set up. They also help your heirs avoid having your assets go through the court system, also known as probate.
It also protects you by laying out the terms of how the trust will be managed in the event that you become incapacitated or incompetent. This protects you from having to rely on your beneficiaries to take care of you when they might want access to your assets sooner than later.
Revocable vs. Irrevocable Trusts
You'll have to create a revocable trust if you want to be able to change the terms of your trust during your lifetime, explains the American Bar Association. You would set up an irrevocable trust if you don't want anyone to be able to modify your trust, including yourself. While you can act as the trustee of a revocable trust (the person who manages the trust and its assets), you cannot do this if you set up an irrevocable trust, even if it’s created with and holds your assets. You must hire a third-party trustee in this case.
People who want to benefit from the assets of a trust during their lifetime (such as by living off the interest) and who want to be able to manage the trust themselves would typically set up a revocable living trust. You can specify where you want your assets to go after your passing.
How to Set Up Your Trust and Live Off Interest
You'll want to work with an attorney who specializes in estates and trusts to draft the document that specifies how your trust will work. A trust is the set of guidelines that specify how your assets will be used during your life and distributed after your death. A trust fund is the actual legal entity into which you place your assets, allowing a trustee to manage them, according to Trust & Will.
Your attorney will help you create a trust agreement, which specifies that you wish to create a revocable living trust, live off the interest and income generated by the assets and have the assets distributed in a specific way after your passing.
You can put your assets into it after it's created. You should have already discussed with your attorney the tax implications of the type of trust you've chosen to set up because you plan on living off the interest of these assets.
You’ll obviously put interest-bearing assets into it, such as bonds and certificates of deposits. Technically, capital gains from investments like stock appreciation and dividends are considered investment income, not interest. They aren’t classified as interest, but let's assume that you want to put your investment-income-generating assets into your living trust.
You might also want to put income-generating assets, such as patents, copyrights and royalties, into your trust fund because you’re planning on doing more than just living off interest-bearing assets. You can also place non-income-generating assets into your trust, such as your house, jewelry, artwork or collections, to help address probate and tax issues after your passing.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.