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Estate Planning—How Living Trusts Work

Date: August 30, 2012

Estate Planning and Living Trust

You have assets to protect as a small business owner. A living trust can help your heirs bypass a complicated legal process when you die, helping them settle your assets quickly and with few hassles. Here’s how one works.

A trust is different from a will.

"A will is a document which directs how your assets are to be distributed at your passing," says Bradley J. Franc of Pittsburgh-based law firm Houston Harborough. In other words, a will gives the court direction for your assets, but can be contested in court. A trust, however, legally holds ownership of your assets, Franc says, and specifies who will benefit.

You can transfer assets to a living trust during your lifetime.

Putting yourself or a confidant in charge. (It’s called "living" because you create it while you are alive. A revocable living trust can be modified after creation, but an irrevocable living trust cannot.) "You always need a will," he adds. However, if you want to save time and money for your heirs, you need a trust, too.

With a trust in place, your inheritors can avoid court time.

Court can be expensive, time-consuming and difficult to manage, Franc says. It is especially beneficial to business owners with real estate or business operations in multiple states, he adds, by keeping them out of court in multiple jurisdictions. (Note: Trustees and beneficiaries can still file lawsuits against a trust. Individuals not mentioned in the trust cannot.)

Revocable trusts can also mean tax breaks.

"Usually a living trust can be designed to minimize or eliminate state inheritance taxes and/or federal estate taxes that may otherwise be imposed upon the value of a person’s assets at death," says Ron Fotheringham, founding partner at Vial Fotheringham in Portland, Ore., an estate planning firm. For example, trusts that administer the estates of married couples can be designed to take advantage of each spouse’s individual exemptions.

There is also confidentiality to consider.

The adjudication of a will is a public process, while a trust will more often than not escape publicity, Franc says.

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First Steps

Your first step in setting up a trust should be to take a complete inventory of your assets and decide what you want to transfer to your living trust, Franc says. Then hire an attorney. Franc also advises transferring or retitling assets under the trust. "Otherwise [they] get lumped into the general will," Franc says.

A living revocable trust comes at a fairly small cost: The typical setup fee for a business owner is between $1,500 and $2,500, depending on the types of trust provisions that fit the owner’s circumstances and whether the owner is married.

How I Set Up My Living Trust

For NFIB member David Bakke, co-owner of MoneyCrashers.com, a personal finance advice site, setting up a living trust was not just a way to avoid potential quarrels among his family, friends and employees. By making sure his assets steer clear of court proceedings, his business will, "be able to continue to run without encountering any extended stints" in court, or other delays, he says.

Bakke consulted with his business partner and a lawyer to set up a buy-sell agreement that will transfer ownership of the business should either of them die.  Then, Bakke worked with a specialized attorney to set up his trust. He decided that the cost of hiring a lawyer to set up a living trust would cost far less than potential court clashes over assets. "I wanted to get all bases covered regarding my personal assets and my business should something happen to me," Bakke adds.

As a business owner, Bakke had to consider the business’ future. Under the buy-sell agreement his business will transfer to the surviving owner, who will determine what percentage of the business will go to others.

Read next: 5 Essential Parts of a Small Business Owner's Estate Plan

 

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