Summary: In this article, we will answer the question: Do I need a living trust? Topics also include: the definition, benefits and drawbacks, the difference between a living trust vs will, and who benefits the most.
A common question in estate planning is the difference between a will and a trust. Many planners experience difficulty when deciding the best way to plan their estate. Look no further, because today we will explain what a living trust actually is, how they are beneficial and whether or not it’s right for you.
After reading this article, you should determine if a living trust or will is best for you, your assets, your children or beneficiaries and your estate planning goals.
What is a Living Trust?
A living trust is a fiduciary relationship created during an individual’s lifetime where a designated person, the trustee, is given
responsibility for managing that individual’s assets for the benefit of the eventual beneficiary, according to Investopedia.
A living trust is basically an estate planning tool. They are “living” because they are created now, when you are alive. It can be revocable or irrevocable. With a revocable trust, you can revoke or amend the trust at any time. While an irrevocable trust cannot be changed once it has been signed.
All of your assets, investments, real estate, bank accounts and other valuables, are placed in a living trust. You can use the trust to your benefit while you’re alive, and outline the details of who gets what, upon your death.
There are a number of benefits to setting up a living trust, which we will cover next.
8 Benefits of a Living Trust
1- Avoid Probate
Probate is a legal process where your estate is handled by the probate court. The court must validate your will, then an executor is in charge of paying any owed debts and distributing assets to your heirs. If you have a large estate, your will may be disputed in probate court. It can be an extremely time-consuming and expensive process. Avoid probate altogether by keeping your assets in a living trust.
2- Assets Distributed Quicker
Ever wonder why it takes so long to receive inheritance from a parent or relative? The answer is probably simple: they had a will and it’s in probate. Not only can probate be expensive, the process can take months or even years, especially if there are disputes regarding the will. With a living trust, assets may be dispersed within a few weeks.
3- Reduce Estate Taxes
If you are married, a trust could offer some savings on your estate taxes. Different states have different tax laws, so it’s smart to do research regarding your particular state. For example, in Massachusetts, a couple may save around $100,000 on estate taxes upon the death of the second spouse.
4- Protect Minor Children
Another great feature of establishing a living trust is for the protection of any minor children you may have. Basically, a trust can hold money for the minor until they are old enough to manage it themselves. You can designate an age and when they are allowed to access the money.
5- All Property Types – including out-of-state
Maybe you have noticed that owners of more than one property are big proponents of keeping their assets in a living trust. This is especially helpful if you own real estate in more than one state. Establishing a revocable living trust will allow you to deed the out of state property into your trust.
Let’s say you live at your primary residence and own a property or multiple properties out of state. By putting all of your property deeds into a trust, you will avoid potentially two or more separate probates in different states.
When a will is probated, it becomes a public record with information regarding the value of your assets, oftentimes including an inventory of your assets. What this means is that anyone can access these public records and view your estate.
A major benefit of a living trust is that it’s a private document and the contents of you estate will be kept out of the public record. If you don’t want the details of your estate, beneficiaries and distributions, it’s a good idea to set up a living trust.
7- Avoid Family Fights
The idea here is saving grown-up kids from themselves and avoiding any disagreements regarding your estate. You can also dictate how and when money is distributed to each child. For instance, if one of your children isn’t good with money or has a drug or alcohol problem, the trustee of your estate can keep the money in the trust and distribute it, as needed.
Because living trusts cannot be disputed, you will be saving your kids from fighting over your estate and keep the process as peaceful as possible.
8- Protect Yourself While You are Alive
In the event that you are incapacitated and unable to make decisions regarding your estate, a living trust can protect you and your assets. The designated trustee of your estate is then able to manage the assets in the trust to your benefit. This ensures that no matter your physical or mental state, you will be taken care of financially.
2 Drawbacks of a Living Trust
1- Set Up Cost
Perhaps the biggest drawback of a living trust is the cost of setting it up. On average, expect to pay between $1,000 and $3,000 for an estate planning lawyer to set up your trust and transfer all your assets into it.
2- You Have to Fund It
Because a living trust is “living”, you have to be involved in maintenance and funding. Maintaining a trust will come with some ongoing costs that you may decide isn’t worth the money.
Living Trust or Will?
A question that gets asked all the time is, do I need a living trust or a will? The short answer is, it depends. One advantage of a will is that is much cheaper to draw up than a trust, around $300.
However, the purpose of a living trust is to set your estate up for easy transfer of your assets, according to your outlined agreement. A trust also avoids the often expensive legal process of probate. This is a major reason an individual planning their estate chooses a living trust over a will.
Do I Need One?
A living trust may not be right for everyone. If you are a middle-aged person, in decent health, then you don’t necessarily need to set up a living trust, at least not right away. Usually, if you are under the age of 55, a will may be sufficient.
However, if you fall into any of the below categories, you will benefit the most from getting a living trust.
- You have minor beneficiaries
- You are single
- You are married
- Couples in second or later marriages
- You own multiple properties
Hopefully, after reading this article we’ve helped answer the question: do I need a living trust? Setting up a trust right now may not be necessary for everyone, depending on your age and health. Regardless, everyone should have at least an idea of how they plan to manage and maintain their estate.
If you are looking for additional information regarding a living trust and estate planning, check out one of our previous articles, The Ultimate Estate Planning Guide for Wealth Preservation.