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Taking Care of Mom and Dad: Living Trusts

Generally, a living trust is used as an alternative to a will; it gets its name because you set it up when you're alive, transfer all or most of your assets into it, then administer it yourself as trustee.

Living trusts cost more at the front end to set up than wills, but the extra cost is often worth paying. At your parents' death, assets in the living trust are distributed according to their provisions, without supervision of a court. A properly designed living trust makes the handoff of assets clean and private.

Living trusts do not cut estate taxes. During your parents' lives, they have to pay taxes on investment profits made by the trust and, after they die, their estate still owes estate taxes. So they should still use gifts and other tactics to reduce the size of their estate.

A simple living trust is revocable. Your parents (the grantors) transfer assets to the trust; but the trust document allows them complete control over everything, including the right to terminate the trust, during their lives.

If there is only one grantor, the simple living trust becomes irrevocable at his or her death. If the grantor has been serving as his or her own trustee, it is imperative to have an alternate named to handle post-death affairs and property distribution.

In the case of a married couple with children, on the death of the first spouse, the trust usually remains revocable. The survivor stays in control as sole trustee. But -- again -- it is critical to have an alternate trustee already in place when the second spouse dies.

When your parents are gone, you'll have two basic options for the disposition of trust assets: a division into separate trust shares for each child; or continuation as a single fund for the benefit of all the children until specified ages, at which time total or partial distribution occurs. The single pot approach is usually best, since it allows more flexibility in dealing with emergencies or special needs.

In the broad financial context, there are three main advantages to using a living trust:

  • Avoiding probate. It can save you significant time and money on the administrative and attorneys' fees related to this legal process. (We talk about probate more...a lot the next chapter.)
  • Privacy. Probate is a public process; wishes in living trusts are kept private.
  • Flexible management. You can turn over the management of your trust during your lifetime to your successor trustee. In most cases, you can scrap the whole trust and start a new one. Just make sure that the grantor retains the right to terminate the trust, regardless of who's managing it.
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