When most people think about wills and trusts, they usually associate them with wealth. This is especially true for living trusts, as everyone has heard the phrase "trust fund kid" and similar things drawing a line to having a lot of money.

However, trusts do not automatically correlate to wealth. Any Huntsville attorney here in Alabama will tell you that they make for a potent estate planning tool — regardless of whether an individual is considered wealthy. 

This article will tell you everything you need to know about living trusts in Alabama, including when you need one. So keep reading to learn more. 

What Exactly Is a Living Trust?

A living trust is a fiduciary or legal agreement that stores your assets in a trust account. The trust itself is drawn up by you —the trustor — with explicit directions on who will inherit the assets within it and when. 

When you decide to draw up a trust, you'll have to choose someone to manage the assets within that trust when the time comes. The "time" is when you pass away or if you become mentally incapacitated and can no longer manage your affairs. This person is referred to as the trustee. They will also be responsible for dispersing the trust's assets to the intended beneficiary when the time comes. 

Unlike a testamentary trust, a living trust is made while you're alive versus when you pass away. A testamentary trust is a trust that's specified in your last will, becoming active once you pass on. This means that having a testamentary trust won't be beneficial to you if you plan for your family to avoid probate court with specific assets as much as possible.

One of the most common reasons individuals choose to draw up trusts is to protect certain assets. Once assets are put into a trust, they are no longer subject to creditors or other liens. When the time comes, trusts bypass probate court proceedings as the assets legally fall under the beneficiary's ownership.

The most common living trusts include revocable, irrevocable, and specialized trusts.

They are defined as follows:

Revocable Trusts

As the name states, a revocable trust is a trust that can be revoked. In other words, it can be completely dissolved or altered at any time while the trustor is still alive. Revocable trusts provide a more flexible option. They allow the trustor to continue managing the assets within them, acting as their own trustee while still alive and mentally capable. 

You can change the roles with revocable trusts, including naming your successors (a new trustee and beneficiary) to take over whenever you deem it necessary.

Irrevocable Trusts 

Irrevocable trusts, on the other hand, are set in stone. Once you draft an irrevocable trust, notarize and file it, it cannot be altered or dissolved. At least not without the consent of the named beneficiary. 

Irrevocable trusts work by the trustor transferring money, property, or other assets into the trust account. Once the assets are transferred, total control and rights to those assets are relinquished. They are now legally owned by the named beneficiary until the specified date and time. 

The date and time of releasing the trust are up to the trustor's discretion. For example, the assets may be released upon the trustor's death or a specific birthday or milestone in the beneficiary's life. 

Giving up control of your assets while still alive may seem nonsensical. However, irrevocable trusts are popular as they can help you lower your estate taxes in addition to private court proceedings. They also protect your assets from divorce proceedings, lawsuits, debts, and other liens. 

Specialized Trusts

When we talk about specialized trusts, we're talking about both revocable and irrevocable trusts with unique circumstances. 

For example, you can set up charitable trusts to send specific assets of your choosing to a charity. Or, if you have a child with special needs, you can create a special needs trust to protect them from losing other benefits. 

There are also joint trusts for married couples, generation-skipping trusts for grandchildren, spendthrift trusts, etc. Suppose you're interested in setting up a trust for a specific purpose. In that case, all you have to do is talk to your Huntsville attorney about what you're looking for, and they can get you started on your best options. 

How a Living Trusts Differ from Last Wills

Wills and trusts often overlap, making it confusing when you're trying to plan your estate effectively. A will is a legal document that describes how you want your assets allocated after your death. Technically a trust does the same thing, but trusts are more specific. They only deal with certain cash amounts or certain assets with a named beneficiary for each.

Let's take a look at the critical differences between the two: 

• Wills take effect upon death, while trusts take effect upon creation and signing.

• Wills must go through the probate process before your assets can be distributed. Living trusts do not go through probate.

• Wills cost less to prepare compared to trusts. However, they tend to cost more for your heirs due to the costs associated with the probate process.

• Wills are a matter of public record, while living trusts are 100% private.

• Wills allow you to name a guardian for underage children while living trusts do not — although you can create a living trust for underage children under guardianship care.

• Trusts set up by a living trust attorney allow you to appoint a trustee to manage your assets should you become mentally incapacitated. Wills do not. 

• Wills can be contested, while trusts are next to impossible to overturn.

It should be noted that when it comes to estate planning in Huntsville, AL, it's strongly recommended that you include both a will and trust. Even if you choose to create trusts for all your assets, having a will can provide you with a safety net should you forget any assets or acquire new assets before you have time to create a new trust for them.

Your Huntsville attorney will refer to this as a "pour-over will," and it's essential if you need to name a guardian for any underage children or even beloved pets. Wills are also meant to provide directions for your funeral and burial. They keep your assets from falling under the Alabama Intestate Succession laws.  

What Are the Benefits of Setting Up a Living Trust?

Setting up trusts with a living trust attorney comes with several notable benefits, including:

• Bypassing probate. The state legally mandated that probate court proceedings evaluate and assess your assets for their value. This is primarily to determine the taxes owed and verify your will and beneficiaries. However, probate proceedings can take up to nine months to complete, and your assets are withheld. In addition, living trusts don't go through probate court because their assets cease to legally belong to you once they're created by a living trust attorney. 

• They're 100% private. Probate is a state legal process. When your will is taken under the court's evaluation, it becomes a matter of public record. Therefore, anyone can gain access to your personal and financial information. Living trusts do not go through probate and are private accounts by nature. So, no one can get their hands on your financial or personal information.

• They offer protection. Along with your privacy, living trusts also protect your assets and beneficiaries. The trust account itself protects the assets from creditors, lawsuits, and other liens while your trustee manages the assets. In this case, they can protect your beneficiaries if they're too young to work their own money or have other issues that would keep them from managing their new assets efficiently. Additionally, if one of your beneficiaries has special needs, having a trustee manage their assets will keep them from losing significant assistance since governing bodies do not consider trust funds as income when determining eligibility for benefits.

• They save money. Since living trusts allow you to avoid probate proceedings, they also allow you to prevent the associated probate fees. So, while trusts are costly to create, they can save your family the financial burden when the probate court takes over the rest of your estate.

Living Trusts and Estate Taxes

Usually, one of the most significant benefits of living trusts is that they minimize your estate's overall value, which reduces the amount of estate taxes you'll owe later on. 

In the state of Alabama, there is no state estate tax, which lessens that financial burden somewhat. However, there are federal estate taxes, which living trusts set up by a living trust attorney can help reduce almost entirely. It all depends on the type of trust that's created.

It should be noted that basic trusts don't get exemption from federal estate taxes, but specialized trusts such as joint or marital trusts do. With marital trusts, the property passes onto the surviving spouse and then later to the surviving spouse's beneficiaries. Passed along with it is the first spouse's tax exemption. 

Federal estate taxes in Alabama mainly depend on the overall value of your estate. This is something that your Huntsville attorney will address after you've evaluated and appraised your home and other assets of value.

How Do I Know If I Need a Living Trust?

Once again, you don't have to have amassed millions in your lifetime to need to create a living trust with a living trust attorney. If you're wondering whether creating trusts is the right thing for you to do, as yourself the following questions:

• Do you have any young children?

• Have you had multiple marriages?

• Do you have any financial interests in a business?

• Do you own a business?

• Do you have any immediate family members that are mentally or physically disabled or ill?

• Are you estranged or on bad terms with any family members?

• Do you feel your immediate family members are too young or irresponsible to manage their own financial affairs?

• Are there specific assets you want to be kept in your family?

If you answered yes to one or more of the above questions, then yes, you need to think about creating a living trust. But, of course, these aren't the only circumstances that indicate needing a trust, which is why it's best to speak with your Huntsville attorney to determine your most suitable options.

Need help with your estate planning in Huntsville, AL? Get in touch with us today to schedule a consultation with Sarah S. Shepard or another Huntsville attorney specializing in estate planning. We can guide you through all of your options when creating a living trust and ensure that your estate planning is done efficiently and effectively.