What is a Living Trust and Why You Should Have One

March 24, 2021

What is a Living Trust and Why You Should Have One

March 24, 2021

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Estate planning is important, no matter your age, wealth, or financial assets or status. Basic estate planning often covers a will and advanced healthcare directives, which lets your medical team and family know your wishes for your health and care in life-threatening medical situations. A living trust is an extension of estate planning—more advanced and often costlier than a will but well worth the investment.

What Is a Living Trust?

A living trust is an entity, a legal document, that houses your assets (investments, bank accounts, real estate, valuable personal property) in a way that avoids probate and transfers them to others in a timely and cost-effective manner. It is especially effective for larger estates with many assets, married couples or couples in second or later marriages (who may have different beneficiaries, such as children or grandchildren from previous marriages), and those who own real estate located outside your primary state of residence.

With a living trust, you are the grantor but also the trustee and beneficiary while you’re alive; spouses can be co-trustees, if desired, or you can assign a relative or an appointed professional trustee, like a financial institution or lawyer (read more about trustees here). You remain in control of your assets while you’re alive and can move them in and out of the trust whenever you choose. Upon your death, the trustee ensures your instructions are carried out as outlined in the language of the trust—period, end of story.

A revocable living trust allows you to change your trust at any time, as opposed to an irrevocable living trust, which essentially transfers all ownership of your assets to the trust, thus legally removing you as the asset owner. This type of trust cannot be changed, amended, or canceled without the approval of the beneficiary or beneficiaries—and often necessitating court involvement. In contrast to a will, you name a successor trustee in a living trust who would act on your behalf if you became incapacitated. This makes your wishes very clear and allows your estate to be handled without court involvement.

Another important aspect of a living trust is the co-creation of a pour-over will, which feeds assets into the trust if you pass away—essentially putting any assets not already in the trust into the trust. For example, you bought a rental property but forgot to fund it in your trust (e.g., put the name of your property into your trust). A pour-over will automatically puts that estate in your living trust in the event of your death and helps you again avoid probate for that asset that was not officially in the trust.

Main Advantages of a Living Trust

  1. Allows you to bypass probate, or the legal process proving the last will and testament’s legality and transfer of your property to beneficiaries when you die, and the courts. This is probably the biggest advantage of a living trust. A will must go through the courts to distribute assets—a lengthy and often costly process, especially in states like California. A general rule of thumb: the larger the estate, the longer and more expensive the probate process.
    1. Probate fees are taken as a percentage of the estate and apply against GROSS value, not NET.
    2. In California, for example, any estate that exceeds $150,000 in gross value must be admitted to probate. For real estate, the value cannot exceed $50,000.
    3. Take an estate worth $1.8 million. The total attorney fees under California Probate Code 10810 would cost $31,000 and take up to 2.5 years. Executors can also take the same or a similar fee if they choose, taking the fees to a total of $62,000. Plus, the estate is responsible for all other costs.
    4. If the estate is especially complicated, the judge can award additional compensation for “extraordinary services.”
  2. Offers more privacy than a will as you don’t have to register a trust with the courts. Wills are public documents, and probate is a public process. A living trust is more private as it is not a matter of public record—plus (and again), it avoids probate altogether.
  3. Offers more protection from challenges, as the challengers have to prove you were coerced into signing and funding the trust.
  4. A revocable living trust is changeable, allowing you to change it at your discretion while you’re alive.
  5. Trusts can be set up in a way that the assets may be gifted or distributed from the trust to a beneficiary over a period of time—even spanning across generations. This provision in your trust can This promotes the beneficiary’s personal development, independence, responsibility, and freedom. A mass, direct transfer of assets to your beneficiaries can sometimes create a sense of entitlement and cause a lack of energy, focus, and motivation. Obviously, this is a very personal decision, but one that a living trust allows you to make.
  6. Allows your co-trustee to immediately take the wheel if you become incapacitated or incapable of managing your estate. If you only have a will with no durable power of attorney, this will require the court to appoint someone to oversee your finances. They also must have court approval for expenses, asset sales, etc.

Disadvantages of a Living Trust

The most effective way to create a living trust is with an estate planning attorney—but this also costs money, as opposed to online tools that allows you to do this for little to no cost (but again, not recommended). Attorney fees depend on your estate’s complexity, but many charge a flat fee to set up a standard and more basic trust. This makes a living trust more costly and time-consuming to set up.

You also have to fund your estate, which means all of your assets need to be retitled in the name of the trust. Again, an estate planning attorney can remove some of the headache by assisting with this—but you may be required to do this yourself.

A living trust transfers your assets into the trust, which then becomes the asset “owner.” This means if you want to sell something in the trust, you have to remove it from the trust before doing so. This can be inconvenient—but the benefits of protection and privacy often outweigh this. Remember, a living trust does not offer asset protection from creditors.

Keep in mind that a living trust cannot appoint a guardian for your children in the event of your death; you need to create a will for this purpose.

Questions to consider during the formation of a trust:

  • What is the most important reason or purpose for creating this trust?
  • Has the purpose of the trust been clearly communicated to the beneficiary, and, if not, when and how should it be, based on the beneficiary’s specific circumstances?
  • What outcome do I want this trust to accomplish (i.e., what is the destination?)?
  • Will the existence of this trust enhance or disrupt the life of the beneficiary?
  • What is the beneficiary like (e.g., is he/she mature, fiscally and socially responsible)?
  • Where is the beneficiary in his or her life (what stage of development)?
  • If the trust were to end tomorrow, with all the assets distributed to the beneficiary, would he/she have the knowledge, maturity, and competency to receive and steward the funds well? If not, what steps can I, the trustee, or others take to help the beneficiary develop the requisite knowledge to address those concerns?

A living trust may not be for everyone, but it can give you peace of mind that your assets will be smoothly and painlessly distributed how you want them to be, removing some of the stress and tension that can come about after a death in the family. A simple will may be the answer for most, but if you have a large estate, many assets, and/or a large family, a living trust is likely the better option.

Every strategy is dependent on a variety of different factors, so make sure you read the fine print.

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