What 5 Things Should You Consider When Setting Up A Living Trust?

If you want to set up a living trust to avoid probate and ensure complete inheritance planning, what five things should you consider and what five items should you prepare?

1. Beneficiaries Who should the beneficiaries include? Of course, your own children, including adopted children, or others besides children, such as charitable organizations. Consider how much to give, whether as a percentage or a fixed amount. The first thing to consider is who the beneficiaries should be.

2. Distribution Method Generally, many people leave their property directly to their children after their spouse has passed away. This is the first common practice, but sometimes the situation is different. For example, in my trust plan, if my wife and I die early and our children are under 50, they can only take the interest and not the principal. At age 50, they can take one-third, at 55, they can take another one-third, and at 60, they can take the final one-third. The reason I do this is that by doing so, the property does not belong to the child and cannot be divided in a divorce. A living trust becomes irrevocable after death and someone may worry that if the child’s spouse remarries, the property may be at risk of being left to someone else, especially if the husband remarries a young woman; the property may be given to the future wife after the husband’s death. To prevent this situation, the trust can be split into two trusts after the person dies. If the wife dies, her portion can be left to the children rather than directly to the husband, so it is not a problem if the husband remarries. Another important thing is that in the United States, if both spouses are not U.S. citizens, they must pay estate tax immediately, unless a provision is added to split the non-U.S. citizen portion into another trust, which will not be taxed immediately. The way assets are distributed will be an important part of the content.

3. Who Will Manage the Property After You Pass Away Ideally, it is best for these three roles to be filled by the same person. Who are these three people? After the person dies, the property in the trust will be managed by the successor trustee of the trust. If some property is not put into the trust or left out of the trust, it may need to go through probate, and an executor must be appointed to handle the probate and then return the property. If someone has a stroke or loses consciousness, who will make financial decisions for them? Do they need a financial agent? These are the three things that need to be considered, and ideally, the same person should handle all three.

4. Can writing a will in the US allow you to avoid probate?

Writing a will cannot avoid allow you to probate. As we mentioned before, the most important thing for probate is that the assets have to be owned by a contract with specified beneficiaries. A will only designates beneficiaries, but it is not a contract, so writing a will alone cannot help you avoid probate.

5. Why should life insurance be placed in an irrevocable trust?

In the US, if you are not a US citizen and you buy US life insurance, the insurance payout is exempt from income tax and estate tax. However, if you are a US citizen or green card holder, and your beneficiary is someone other than your spouse, and you are both the insured and policy owner, the insurance payout will be subject to estate tax. So, if you want to use life insurance to avoid estate tax and do not want the insurance payout to be counted as part of your estate, you should only be the insured and not the policy owner; instead, you should name your adult children as the policy owners. However, there is a risk that the cash value of the policy may be spent, become the subject of a lawsuit, become lost, be affected by divorced, or even left behind by your children. Placing the life insurance in an irrevocable trust can help you avoid all of these problems. Therefore, by placing life insurance in an irrevocable trust, since it is not considered yours, the insurance payout is both exempt from income tax and estate tax.

In summary, in the US, people usually combine living trusts and life insurance trusts to solve probate and estate tax issues, by designating beneficiaries in living trusts and placing life insurance in irrevocable trusts. Therefore, setting up a trust is not expensive and can make many things easier; it is indeed a very useful tool. If you want to learn more about trusts, please contact us.

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