The revocable living trust is a very useful estate planning tool that is the ideal choice for a wide range of people. We are going to address a question that people often have about taxation in this post, but first, we will provide a general overview so you understand the benefits.
Efficient Estate Administration
If a simple will is utilized, the administrator would be the executor. The will would be admitted to probate, and the administration process would take place under the supervision of the court.
This in and of itself is a bit inefficient, because there are prescribed steps that must be taken, and it is time consuming. The inheritors do not receive anything while the estate is being probated, and it will usually take close to a year if there are no particular complications.
Aside from probate, the executor has to identify and inventory the assets that will be distributed to the heirs, and they will be prepared for distribution.
When a living trust is utilized, the assets will be distributed outside of probate. All of the resources that comprise the estate would be owned by the trust, and they would be listed in an orderly fashion.
The estate administration process is streamlined when a living trust is used, and this is a major positive for the inheritors.
Retention of Control and Flexibility
A lot of people think that you no longer control assets that you convey into a trust. This is true to a large extent as it applies to an irrevocable trust. However, a living trust is revocable, and you can act as the trustee while you are alive and well.
If you establish this type of trust, your ability to utilize your assets the assets that you convey into the trust would not change at all. For example, if you transfer ownership of your home to the trust, you would have the same rights and responsibilities.
When you establish the trust declaration, you would name a successor trustee to act as the administrator after your passing, and your heirs would be the beneficiaries. You could change the trustee and/or beneficiary designations and the specific terms of the trust at any time.
You can include a spendthrift provision that would protect the principal from the creditors of the beneficiaries. If you want to instruct the trustee to distribute limited assets over an extended period of time to prevent inheritance squandering, you would have the ability to do so.
Income Taxes on Trust Distributions
Now that we have covered the basics, we can get to the tax question. Distributions of the principal would not be not taxable, because the core assets were acquired with after-tax earnings.
However, distributions of interest income would be taxable to the beneficiary, and the trust would have to pay taxes on undistributed interest accumulation.
Access Our Estate Planning Worksheet
We have a number of useful resources that you can access right here on our website free of charge, and one of them is our estate planning worksheet. If you take the time to go through it, you will come away with a more thorough understanding of the estate planning process.
You can get your copy right now if you visit our worksheet page and follow the simple instructions.
Today is the day for action if you are going through life without an estate plan, and we can help you revise your existing plan if an update is needed. You can send us a message to request a consultation appointment, and we can be reached by phone at 860-548-1000.