Is a Living Trust the Right Move for Your Estate Plan?
A living trust (or revocable trust) can bypass probate court, safeguard your family’s privacy, and preserve your wealth — if you set it up correctly.
A living trust is a legal document you set up while you’re alive to ensure that the assets you put in the trust, such as real estate, stock and bond holdings, CDs, and jewelry, are distributed in the way you want after your death without your beneficiaries having to go through court probate to receive the assets you pass on to them. It can be an essential part of estate planning.
A key benefit of a living trust, also known as a revocable trust, is that you retain control of your assets and property in the trust during your lifetime. You can modify the trust, such as adding a newborn as a beneficiary, adding or removing assets, or changing who gets what.
With this type of estate planning tool, you typically act as the primary trustee while you are alive and competent, keeping full control of your assets. However, you may also name a third party, known as a successor trustee, to step in and manage the assets on your behalf when you die or are incapacitated. This successor trustee acts as a fiduciary, distributing the proceeds of the trust to your beneficiaries based on your wishes.
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"A living trust is really a shell in which you place your assets so that when you become incapacitated or pass away, your wishes are respected," said Harry Drozdowski, senior wealth planning strategist at Wells Fargo.
What are the benefits of a living trust?
Avoiding Probate. Assets held in a living trust can be distributed to beneficiaries without going through the court system, a dreaded process known as probate. This legal procedure, in which the court validates a deceased person’s will, is time-consuming, typically taking months and sometimes years. Probate also comes with costly attorney and court fees. Avoiding probate by creating a living trust ensures your assets pass to beneficiaries more easily, quickly and privately.
Preserving Privacy. Another perk of a living trust is that avoiding probate keeps your financial affairs private and out of public view. In contrast, a will, which must pass through probate, becomes part of the public record, which means your nosy neighbor can find out how the estate was divided up and who got what.
Preparing for Incapacity. With folks living longer, it’s increasingly important to prepare ahead for any unexpected physical or mental issue, such as brain trauma or dementia, that makes you unable to manage your own affairs. A living trust ensures your trustee distributes your assets as you specified in the trust and in the best interests of your beneficiaries.
"Living trusts are a very efficient way to leave money to your family or people you care about because it protects those assets," said Certified Financial Planner Brad Bernstein, a managing director at UBS Wealth Management. "It puts a layer of protection around your assets for when you’re no longer here, and it avoids probate and keeps your business confidential." That said, only an irrevocable trust will protect your assets from creditors, Medicaid estate recovery or lawsuits. A revocable trust keeps your assets out of probate.
How do you set up a living trust?
To get started, meet with an estate-planning attorney. To create a living trust, you’ll need to choose a successor trustee, typically a person or professional you trust that you want to settle your affairs.
Next, create a list of assets that you want to transfer to the trust and leave to loved ones, charities or other beneficiaries. Specify the beneficiaries and which assets you’re leaving to them. Finally, and this is important, fund the trust by transferring title to the assets into the living trust.
Keep in mind that some assets are better to inherit than others. Read up on both the best assets to inherit, as well as the worst assets to leave your heirs.
"If something’s not in there (the trust)," said Drozdowski, "the trustee will be unable to manage those assets."
Let’s say, for example, you have a disabled child, and you want the trustee to manage the money you leave behind for their care after you pass away. If the investment account isn’t listed and funded in the trust, the trustee is unable to make legally binding financial decisions for your child.
Often, the person creating the living trust completes the entire process but fails to fund the trust. The downside? When they die, the assets meant to be protected by the trust instead fall under the will's provisions.
"You lose all the benefits of the living trust (if you don’t fund the trust)," said Bernstein.
One way to protect against stray assets falling outside of your trust is with a pour-over will. This acts as a safety net for assets you forgot to transfer into the trust. It automatically "pours" them into the trust.
What are the downsides of a living trust?
Despite the many estate-planning benefits of a living trust, these legal documents have limitations. A living trust, for example, won’t help you reduce your estate taxes, says Drozdowski. Nor will it let you sidestep all legal fees, since drafting the document involves costs.
And, if you do create a living trust and dot all the i’s and cross all the t's properly, make sure you alert someone as to the purpose of the document and where it is housed. "Don’t put your living trust in a safe somewhere that nobody (including the person you named as the trustee) knows about," said Drozdowski. "That becomes a bit of a snafu."
Instead, be sure to let the people mentioned in the trust know that you’ve set one up.
"Tell the kids, 'we’ve done a revocable trust and here’s what it means, and here’s who the trustee is going to be,'" said Drozdowski.
How is a living revocable trust different from an irrevocable trust?
A living trust will be sufficient for many people. It lets you control your assets during your life and specifies how you want them managed after your death.
If you have a very high net worth, an irrevocable trust may be a better choice. You will remove assets from your estate, sheltering them in the trust. This type of trust can help you avoid taxes and offers greater asset protection. For more on this decision, read Revocable vs. Irrevocable Trusts: It Comes Down to Control vs Protection.
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