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What is a living trust and when should you use one?

What is a living trust and when should you use one?

What is a living trust and when should you use one?

You may have heard people discussing trusts and wondered what they are and whether they could be useful for your situation.

In this post, we’d like to give you a run-through of what living trusts actually are and what circumstances might make them advantageous.

You can also find our larger guide to trust here if you’d like to know about trusts that are helpful for after you pass on.

What is a living trust?

Wills and Living Trusts are very similar int hat they are a legal expression of your wishes for what happens to your assets however there are some significant differences.

The big difference between a trust and a Will is that a Will is an expression of your wishes regarding what should happen to your assets after you die. A will only comes into force when you pass on and it is this point at which your executor will assume control of your assets.

A living trust comes into force before you die, which means that you can use them at any point to carry out your estate planning.

You can put all sorts of assets into a living trust, from cash or investments to property or even assets such as cars or jewellery.

Once you put the assets into the trust the people who control them (called trustees) have a duty to manage them in accordance with your wishes and generally, this will be immediately upon set up of the trust itself.

What are the benefits of a living trust?

When you put assets into a trust they essentially exit your estate, which means that the time-consuming process of probate is sidestepped.

You can time the point at which the trust starts to give value to the beneficiaries. For instance, you may wish to only give an income to your grandchildren when they reach the age of 21.

A trust can ringfence assets so that in the case of a divorce or marriage the assets go to your children and don’t get split amongst different people later on.

They are also useful if you have disabled children who aren’t able to manage their own money. A trust can be set up that will allow trustees to manage their inheritance to the best advantage of your beneficiaries.

You can also set the conditions in the trust now, in case you are unable to do so later.

For example, living trusts are often used for people who have a degenerative illness so that they can be safe in the knowledge that their affairs are being taken care of by the trustees.

One of the less known but still valuable benefits of a living trust is that of asset protection.

Placing assets into a trust means that they are held apart from the person’s estate. This means that in the case of bankruptcy or other legal action they cannot be seized to pay off debts.

Trusts can also be a useful way of reducing inheritance tax as essentially what you are doing is giving the assets away to someone else to manage, albeit under your directions.

It’s important to note that there are restrictions on what you can do with a trust which will make it outside the Inheritance tax regime so you must take advice here and Smart Will have a team of expert advisors who will be able to talk you through the options.

How do you set up a Living Trust?

The first thing is to repeat our caution from above – take advice as making a wrong move here could prove disastrous.

These are the basic steps for setting up a living trust.

#1 Work out what type of trust will work best

Trusts aren’t a one-size-fits-all device. There are many different types and your advisor will help you decide which one is best for you.

#2 Decide what assets you are going to place inside the trust

There are rules around who can benefit from the trust and you are giving control of the asset away to the trustees so you need to be sure this is the right step for you.

#3 Decide who will benefit from the trust

This may well be at the forefront of your mind but if you just have a general idea of who you want to benefit then now is the time to firm those ideas up.

#4 Choose your trustees

You’ll need to choose people who you trust naturally, but you will also have to choose people who are likely to be able to manage the trust and who will be around to take on the responsibility.

Many people appoint professional firms that specialise in being trustees.

#5 Complete the document

The Trust documentation or ‘trust deed’ is the formal method of expressing your wishes.

This should be professionally drawn up (Smart Will can help with this) and the language should be clear and specific as ambiguous terms might cause problems later on down the line.

Legally there must be clarity over the words, subject and object. In other words, it needs to be clear that you intend to create a trust, what you are putting in the trust and who will benefit.

There are two types of wishes that you can include in the trust. The first, written into the deed itself are the legal restrictions and obligations of the trustees that they will need to abide by.

The second, a letter of wishes is simply your thoughts about what should happen in other eventualities but the trustees are not bound by this and can make different decisions, especially if circumstance change.

Once the document is completed you and the trustees will need to sign in the presence of independent witnesses who will attest that your signature was made and that it was done freely and these need to be actual hard copy signatures and not e-signatures.

 

 

Is a Living trust right for you?

This is a question that only you and your advisors can answer as everyone’s situation is different.

A living trust is useful if you want to put assets into a ringfenced place that will benefit someone else, where you want to reduce your inheritance tax liability or where you want to ensure your wishes will be catered for if you become unable to express them.

The Smart Will Team can arrange for a no-obligation review to see which type of trust is right for you. Alternatively, if you would like to write your Will on the Smart Will App, you can do by downloading it from your App store here.

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