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A revocable living trust is a valuable estate planning tool that can be beneficial regardless of one’s financial status, yet many people neglect to establish one before it’s too late. With that in mind, I thought it would be useful to share some basic knowledge about trusts, and exactly how a properly designed trust can work in your favor.

While a will is usually the first choice for passing on an estate to heirs, revocable living trusts are gaining in popularity, especially among Baby Boomers. A qualified attorney and financial professional can help determine whether such a trust is right for you.

So what exactly is a revocable living trust?

In short, it’s is a written agreement that appoints a trustee to be responsible for managing your property. It’s called a living trust because it’s established while you’re alive. It’s “revocable” because, as long as you’re in sound mental condition, you can change or dissolve the trust at any time at your own discretion for any reason. A living trust usually becomes irrevocable (cannot be altered) when you die.

Benefits of Trusts

  • They ensure your assets stay within your family by addressing specific preferences for how and when you wish your estate to be distributed.
  • They can help you avoid the sometimes time-consuming, usually expensive and always public process of probate. A living trust allows your “successor trustee” to transfer your property quickly and efficiently, without the hassle and expense of probate court proceedings. This way, more of the assets you leave will go to the people you want to inherit it.
  • They can help protect your estate from lawsuits, creditors or predators, as well as from possible future divorces.
  • They could help minimize estate taxes. While only a small percentage of Americans are currently subject to estate taxes, laws are often in flux, so things could change down the road.

How to Establish a Trust

  • Work with an experienced estate-planning attorney. While trusts can be highly effective estate-planning vehicles, they can also get quite complicated, so it’s best to enlist the help of a professional to ensure all your ducks are in a row.
  • Choose a trustee. This individual is legally obligated to manage your trust’s assets in the best interests of your heirs, so it’s important to be selective. You may want to run through the following list of questions before making a decision:
  1. Does he or she have enough time to manage your trust? How does he or she feel about having this responsibility?
  2. Will naming your prospective trustee create a strain within your family?
  3. Do you believe he or she would act in a fair and unbiased manner when called upon to make a decision that could affect other family members or beneficiaries?
  4. Is he or she competent, experienced, and knowledgeable enough to handle your finances?
  • Name a co-trustee and successor trustee. These individuals can respectively help you manage the trust and take over if the person you initially named is unable to fulfill that role. Go through the same above list of questions to ensure these individuals are also worthy candidates.
  • Consider a financial institution as a trustee. This could be the best choice if you can’t think of an individual that possesses the qualities of a proper trustee. By hiring a financial institution, you’ll have the benefit of a completely objective and experienced trustee. Make sure you inquire about fees and what specific services are provided before going this route, however.
  • Share the details of your trust with loved ones, especially the beneficiaries of your estate. When family members don’t know what to expect, disappointment, frustration, and tension often comes as a result. If details have been clearly communicated with them from the beginning, however, you may feel even more comfortable in putting your plans in place.
  • Remember the income tax consequences of trusts. The assets of a revocable trust do count toward the federal estate tax exemption. Estate tax is imposed on that portion of the value of a deceased taxpayer’s estate that exceeds the gift tax exclusion applicable during the year of the taxpayer’s death ($5.43 million in 2015). One income strategy is to gift assets during your lifetime so they won’t be taxed after your death. The annual gift exclusion amount is currently $14,000, so you can leave that amount to your loved ones each year without having to pay federal estate tax.

Bottom line

Could the establishment of a trust be the right choice for you? Talk with a financial professional today and find out. This valuable tool could be a major key to the long-term protection of your estate.

Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and President of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®
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