A living trust is used for a variety of reasons. One is that the trust allows the assets to pass to the heirs without going through probate. Probate can be a very expensive and time consuming process that states use to transfer money from the deceased to the heirs. Many times probate fees are based on a percentage of the net worth or, in some cases, on gross asset values.
A living trust also allows for privacy. When the estate goes through probate, all of the information is public. When an estate has a living trust, the assets and terms are private and not available to snooping eyes.
Another reason for a living trust is that it can allow for an estate tax savings when formed by a married couple. Without a trust, a married couple’s estate does not allow them to effectively double the estate tax exemption. When the first dies, the estate passes tax free to the second spouse, but when that spouse dies only one exemption passes to the heirs. With a living trust, a married couple can pass both the husband and wife’s estate tax exemption to the heirs. This is done by creating two trusts at the time of death of the first spouse. One is created for the dead spouse and one for the spouse that still lives. Sometimes referred to an A / B Trust. The A for above ground and the B for below ground. The surviving spouse will still have access to funds from both trusts for his or her welfare, maintenance and support.
Usually, the Settlors of the trust are also the Trustees. The trusts are normally revocable so that the Settlors can change and alter the terms of the trust at will. The trusts do not provide asset protection, but do provide estate planning.
A typical trust will also have a will for both spouses as well as health care directives. Most couples make their children the beneficiaries of the trust. The one common problem with this is that the trust typically calls for a mandatory distribution to the kids as ages 25, 30 and 35. The difficulty with this is that a creditor of the child can easily get to and attach those funds. It is far better to make the distributions to the children discretionary so that a creditor cannot automatically attach the trust funds.