Living in Retirement

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Living trusts: Learn the basics

April 10, 2013

This is the third in a series of articles to help you understand trusts. Our discussion is focused on revocable living trusts, a type of trust that can be modified while you're living, but can't be changed once you die.

Whether you have a modest amount of savings or a large estate, you've probably given some thought to what happens to your assets when you're gone. Most people know they need a will, but when might you want to consider a living trust?

What are the benefits?

A revocable living trust can offer some distinct benefits during your lifetime and after your death, including:

  • Maintain privacy. Unlike a will, a living trust won't generally become a matter of public record, so you're better able to keep your financial and family affairs private.
  • Avoid probate. Unlike wills, assets held in a living trust aren't subject to probate, a court process that validates the legality of your will. Depending on the state you live in at the time of your death, the probate process can be costly and time-consuming.
  • Reduce family squabbles. Settling an estate can be a complicated and emotional process. With a living trust, you have the option to elect a corporate trustee, an objective third party who can sort through the issues and make sure the best interests of everyone in the family are fairly represented.
  • Provide for young children. A living trust can hold money until a child reaches a certain age or make periodic distributions as beneficiaries reach certain ages.
  • Help plan for your eventual incapacity. During your lifetime, a living trust can provide for your financial care in the event you become incapacitated or are otherwise unable to manage your own financial affairs.
  • Handle real estate transfers. If you own real estate in multiple states, you can avoid going through probate separately in each state by transferring those assets to a living trust.

So how does it work?

A revocable living trust is a legal document that works much like a will, but it gives you additional control, privacy, and flexibility. With a living trust, you set explicit instructions for the ongoing management and distribution of your assets, both during your lifetime and after your death.

You can transfer your assets to your living trust during your lifetime. Typically, you'll also establish a "pour-over" will, which gives instructions for any assets that aren't transferred to the trust during your lifetime to be transferred at the time of your death. The trust document identifies your beneficiaries and lists the details of how your investments, real estate holdings, and other assets are to be managed and distributed.

Revocable living trusts give you the flexibility to make changes to the terms of the trust during your lifetime. Upon your death, your living trust becomes irrevocable, meaning no one can change the instructions you have provided.

What are the tax implications?

During your lifetime, you'll pay taxes on all the income from the assets in your living trust. And because a living trust can be changed at any time, establishing or funding the trust won't result in gift tax. Since you haven't irrevocably disposed of any assets, all of your trust's holdings will be included in your estate for federal estate tax purposes.

We're here to help

Vanguard has a dedicated team of trust specialists who are available to answer your questions and help you through the decision-making process.

If you decide to establish a living trust, Vanguard National Trust Company, a federally chartered, limited-purpose trust company, can provide trust services, including trust administration and investment management.

In their words: Hear more client stories

 

With our trust services, you'll continue to receive the same low-cost, client-first focus you've come to expect from Vanguard. Our salaried trust professionals receive no commissions, so the advice and services they offer are driven solely by your interests and those of your beneficiaries. Learn more about our trust services.

Read additional articles from our trust series:

Notes:

  • Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
  • Investments are subject to risk.
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