Living trusts enable you to control the distribution of your estate.  Furthermore, certain trusts may enable you to reduce or avoid many of the taxes and fees that may be imposed upon your death.

In short, a trust is a legal arrangement under which one person, the trustee, controls property given by another person, the trustor, for the benefit of a third person, the beneficiary.  The fun part is that when you establish a revocable living trust, you are allowed to be the trustor, the trustee, and the beneficiary of that trust.  Simply, you get to play all the parts in the play.

When you set up a living trust, you transfer ownership of all the assets you’d like to place in the trust from yourself to the trust. Think of it as if you took all your possessions and put them into a box. Legally, you no longer own any of the assets in your trust. Instead, your trust now owns your assets. But, as the trustee, you maintain complete control. You can buy or sell assets as you see fit. You can even give assets away. Effectively, you can have all the same control over your assets as you did before you put them into trust.  So you may ask, “What’s the point of setting up a trust?”  Well, keep reading.

Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn’t anything to probate because the assets are held in the trust. Therefore, properly established and funded living trusts completely avoid probate.  So, you get to skip a lot of the fees and costs associated with probate.  Also, by establishing a living trust you also get to avoid the 12 to 16 months that probate requires.  This is a huge benefit.  Effectively, if you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process.

There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B provision. An A-B trust enables you to pass on up to double the “exemption amount” to your heirs free of estate taxes.  The exemption amount is the amount of money that Uncle Sam allows you to pass on without him taxing it.

When an A-B trust is implemented, two subsequent trusts are created upon the death of the first spouse. The assets will be allocated between the survivor’s trust, or “A” trust, and the decedent’s trust, or “B” trust.  Sometimes these are referred to as the Marital Trust and Family Trust.  Don’t worry about naming protocols.  Let’s just stick with A and B for now.

This will create two taxable entities, each of which will be entitled to use a personal exemption.

The surviving spouse retains full control of his or her trust. He or she can also receive income from the deceased spouse’s trust and can even withdraw principal from it when necessary for health, education or maintenance.

On the death of the second spouse, the assets of both trusts pass directly to the heirs, completely avoiding probate. If each of these trusts contains less than the exemption amount, these assets will pass to the heirs free of federal estate taxes.

Sound like a good deal.  Well, for most people it makes a lot of sense to establish a trust. I’ll be covering some of the other benefits of these types of trusts in later posting, including asset protection benefits.  But, if you need more information right now, you can always go to www.socalassetprotection.com.