What Is a Living Trust, and Should You Have One?

Yet, without specification from the estate holder in advance, a family may disagree over how an estate may be distributed. A living trust is one way to handle your estate's distribution.  

Definition of a living trust

A living trust allows you (the "grantor") to specify an individual to manage your estate according to the terms of the trust. This trustee is legally required to handle the estate in good faith for the grantor's beneficiaries, specified within the trust agreement. While a will can also determine how a person wants their estate handled, these two approaches have significant differences. Key among them is that, unlike a will, a living trust can bypass the probate process.

Living trusts can either be revocable or irrevocable. A revocable living trust allows the trust grantor to rescind the trustee's rights and reclaim them for themselves. In contrast, an irrevocable trust prevents this. The second type makes it very difficult to remove the trustee from their management position over the estate.

Why do you need a trust?

While the specific reasons and nuances vary between individuals, the overriding purpose of a trust is to give you a choice over the handling of your estate. Many people want to protect their family or support causes or entities they're passionate about. 

Without a trust or similar tool, you have little to no influence over what happens to your estate. Unless specified within a legally binding document, the distribution of your estate will depend on state laws and other factors outside your control. 

Suppose you're concerned about your children or relatives conflicting over your estate items. In that case, you may use a living trust to specify the distribution of your estate amongst them. This approach may work best when you discuss the specifications with your beneficiaries, so they understand your decisions ahead of time. The hope is that this will reduce both the risk and the degree of conflict.

A living trust can also be used to separate your estate from yourself and potentially reduce your tax burden. With an irrevocable living trust, the estate functionally ceases to belong to the grantor, removing their control and lowering their estate tax obligation.  

Life insurance and trusts

Life insurance can be placed within insurance trusts, which function somewhat akin to living trusts. A life insurance trust can help ensure that your beneficiary is financially accounted for in a responsible way. It can allow you to name minors as beneficiaries and specify financial guardians to handle the life insurance policy benefit. 

Learn how to set up a life insurance trust and see if this approach is right for you. Answering "do I need a trust?" becomes easier after you understand how to set one up. 

Even when the beneficiary isn't a minor, using a life insurance trust can allow you to choose how the policy payout is distributed between your beneficiaries and over time. For instance, the payout could be distributed in limited amounts at regular intervals. Life insurance trusts can be revocable or irrevocable. To learn more about these specifics, consider irrevocable life insurance trusts. 

Suppose your beneficiaries are legal adults, and you don't wish to limit how the payout is granted to them. In that case, a life insurance trust may not be for you. Since life insurance contracts are legally binding and include beneficiaries, you don't need a will or trust on top of your policy if you'd like to specify adult beneficiaries and leave it at that. 

So, if you've been asking yourself, "should I have a trust or a will," the answer will depend on what's in your estate and how and when you want it managed.

Life insurance with investment features

Life insurance comes in many flavors, with some types including investment features. Permanent life insurance, like whole life, includes a cash value component that can grow over time. This cash value can even be used by the policyholder during their life, unlike a policy payout. 

Like all property, your policy may be considered part of your estate. However, because life insurance plans internally specify beneficiaries, you don't need a trust, will, or estate plan for your life insurance benefits to go where you want them to.

Before deciding on a policy, learn how much life insurance you really need. The coverage size you're looking for can play a significant role in determining what type of policy may be best for you. It's generally wise to make sure the plan you want will have premiums that fit your current budget. To see what your premiums could be, get a free quote online with Ethos.

The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.