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Revocable Living Trusts
Living trusts have become a popular way of owning assets for some people. They can help address a number of important issues, but they are not for everyone.
What is a revocable living trust?
After the trust is established, assets are transferred into the trust by the grantor and the grantor continues to manage them. The taxable income from those assets is reported by the grantor on their individual tax return. The assets are owned by the trust but there is no change in the control or tax treatment of the assets.
When the grantor dies, the assets in the trust are distributed under the terms of the trust document in a way similar to how a will describes how assets in an estate are distributed.
Why consider a living trust?
Avoids probate. When a person dies, his or her assets are deemed to be passed into their estate. The distribution of the assets is then controlled by the terms of a will. Usually, there will be a court hearing about the estate and there can be costs associated with the "probate" of the will. With a living trust, the assets are transferred under the terms of the trust and do not enter the estate. If the assets are complex or the deceased lived in a state with high probate costs, the cost savings can be significant.
Preserves privacy. Wills and estates end up being public matters while living trusts are not. For individuals that do not want their private matters potentially becoming visible to others, a living trust may be attractive.
Speed of asset distribution. The distribution of assets of an estate under the terms of a will can take time, sometimes months or more. A living trust usually allows the assets to be distributed in just a few weeks.
What are the disadvantages?
Tax filings. While the trust will not pay any income taxes, there must be a tax return prepared each year. The tax return shows the income of the trust and "distributes" that income to the grantor for reporting on his or her individual tax return.
Complicated asset ownership. Sometimes the mere fact that a trust owns an asset can make dealing with it more difficult. One area where this is prevalent is with real estate mortgages. Some lenders are inexperienced in dealing with living trust ownership.