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This is a very good question. Distributions of the principal would not be subject to taxation, but the earnings that are generated by the principal would be taxable. The trust would pay the taxes if interest accumulation has not been distributed.
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To account for this, you would include a pour-over will when you are devising your estate plan. This document would allow the trust to absorb the assets that were in your direct personal possession at the time of your passing.
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One of the major benefits is the avoidance of probate. If you use a will to state your final wishes and you do not have a trust, the will would be admitted to probate. The executor would handle the estate administration tasks, and the court would provide supervision. This is a time-consuming process that will usually take 9 to 18 months to run its course, so the inheritors have to play a waiting game. Expenses accumulate during probate, and they will typically consume somewhere between three percent and seven percent of an estate and even more in some cases. Probate records are readily available to anyone that is interested, so there is a loss of privacy. In addition to the avoidance of these probate drawbacks, another advantage is the streamlined estate administration. All or most of the assets that comprise the estate would be held by the trust, so the trustee would walk into a turnkey situation.
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The trust can include a spendthrift provision that would make it impossible for creditors to reach the principal, and the beneficiary would not have direct access to the assets. You could instruct the trustee to distribute limited assets to the beneficiary on an incremental basis to add another layer of protection.
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Yes, you can change the terms along the way, and it is relatively easy to do with a little bit of legal assistance. You can add or subtract beneficiaries, alter the nature of the distributions, and/or change the trustee designation.
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This is one of the benefits that living trusts provide. You could name a disability trustee to act as the trustee in the event of your incapacity. It can be the same person or institution that will be the successor trustee, but this is not a requirement.
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This is entirely up to you, and the right choice will depend on the circumstances. If you are married and you create a shared living trust with your spouse, your surviving spouse would usually become the sole trustee. However, it would be up to you and your spouse when you draw up the trust agreement. The trustee for an individual living trust could be someone that you know personally, or you could engage a professional fiduciary. Trust companies and the trust departments of banks provide trustee services, and this can be the right choice for some people.
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This is one of the most commonly held estate planning misconceptions. Generally speaking, there are two different types of trusts: irrevocable trusts and trusts that can be revoked. The living trust is a revocable trust. Aside from the right of revocation, you have day-to-day control while the trust is intact. You would act as the trustee, and nothing would change with regard to your access to the assets that are technically owned by the trust.
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