Living trusts are created with a clearly defined objective: to avoid probate. Unfortunately, misconceptions about living trusts have spread to the point where people think they can accomplish much more than they can.
If you fear probate, consider a revocable living trust. If you worry about your will being contested or your heirs fighting over your assets, it may be an excellent idea.
You fund a revocable living trust during your lifetime with all or most of your assets. The trust owns the assets; yet, you are the trustee, meaning that you can still use those assets while you are alive. Once you die, the revocable living trust becomes irrevocable, and the trust assets are distributed per your instructions by designated successor trustees. Assets distributed out of the trust are exempt from probate.
In addition to giving you more control and privacy, a living trust may save your heirs time and money. Probate is often lengthy, and the legal costs may eat up 3-4% of a larger estate.
Revocable living trusts do not reduce estate taxes. Assets within a revocable living trust are fully taxable when they are transferred to heirs. Unless someone drafts a common living trust to include tax-saving provisions, it will offer no estate or income tax advantages to the grantor or beneficiaries.
Living trusts can lead to a lot of paperwork. A trust must legally own assets to be effective, so that may mean retitling certain assets and revising bank account and brokerage account forms and other relevant documents.
Living trusts do not relieve trustees of their duties. When a grantor of a living trust passes away, the language in the trust document will not magically “do all the work” for the successor trustee. Many responsibilities can remain for a trustee after a grantor’s death.
A living trust is not necessarily inexpensive. A lawyer may charge you $1,500 or more to create one. If you have significant assets and fear a dispute over your will, the effort may be well worth the cost.
There are living trust solutions available on the Internet and via books or software. However, when cutting and pasting boilerplate language and filling in some names here and there, what kinds of legal and financial risks are you taking?
Also, while having a living trust drawn up with the help of an attorney is certainly advisable, attorneys are human, and sometimes, errors are made. Amending a mistake could cost you further legal fees.
A living trust is not a will. You still need a will when you have a living trust. In fact, you will probably keep accumulating assets after the living trust is drawn up, and as those assets may be outside of the trust, a will should be in place to guide their distribution after your death. A will can legally appoint guardians for minor children; a trust cannot.
A living trust is not a living will, either. It cannot function as a health care directive. Some families ask attorneys to create a health care directive concurrently with a living trust, but the two should not be confused.
You may not need a living trust in the first place. If your financial life has been largely free of “creditors and predators” and you have a simple estate, a thoughtfully drafted, well-executed will could prove sufficient. After all, assets such as IRAs and workplace retirement plan accounts are generally exempt from probate when the IRA owner or plan participant dies.
In terms of time, there is sometimes little difference between distributing assets via probate and through a living trust. In terms of savings, the filing and court fees that come with a probated will may not be that onerous. While the fees may total a small percentage of the value of the estate, the executor may decline a commission if he or she is a family member and requires only hourly legal advice.
As a reminder, this article is intended as an overview of living trusts and should not be relied upon for any kind of legal advice. If you are considering a living trust or another kind of estate planning vehicle, the best “first step” is to talk to an attorney before proceeding.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.