What is a Living Trust?
A living trust is a legal arrangement in which a person transfers the legal title of property (bank accounts, investment accounts, real estate, etc.) to another person (the trustee) who agrees to hold that property for the benefit of a third person (the beneficiary). The same person can be the transferor of the property, the trustee and the beneficiary. Such a trust can be amendable and revocable, or in other words, a “living trust”.
The Pros
1. It lets your estate avoid probate. Upon death, assets held in the living trust do not need to be probated. What that means is they pass to your heirs without having to put your assets through the probate process with the courts, which can be time-consuming and expensive. A successor trustee named in the trust, takes over without court oversight.
2. It lets you avoid “ancillary” probate in another state. If you own property in another state and you put that property into your living trust, your heirs will be spared the additional probate hassles that owning property in another state can bring.
3. It protects you in the event you become incapacitated. If you ever reach the point where you’re unable to manage your own affairs, a successor trustee named in your living trust can step in. That trustee has a fiduciary responsibility to manage trust assets for your benefit.
4. Privacy. A living trust allows you to keep your estate and distribution more private than it would otherwise be with a probate.
The Cons
1. Can be expensive to set up. It generally costs more to set up a living trust than a will. The cost can be three times as much or more. However, it can end up being less when you consider the cost of probate if you had a will.
2. It offers no tax benefits. Many people believe having a living trust will save taxes. This not true. Moving assets into a living trust won’t save income or estate taxes. You still need to implement appropriate tax-reduction strategies.
3. It lacks asset protection. Although assets held in an irrevocable trust are generally beyond the reach of creditors, that’s not true with a revocable living trust. Assets are treated as if they belong to you. If protection is important to you, vulnerable assets might be better off held in an irrevocable trust, a limited liability company or a family limited partnership.
4. It requires some administrative work. Another downside of a living trust is that transferring assets can be both time-consuming and complicated. If you hold a variety of assets, you’ll need to contact your different banks and agents to have everything you own moved over. This can take time and a good amount of paperwork.
Seek Professional Counsel
When making estate-planning decisions, it is important to keep your individual and family goals in mind. A living trust not a one-size-fits-all solution. While living trusts have many advantages, be sure that your personal situation, assets and goals are such that the cost and hassle of establishing and managing a living trust will be worth the benefits. An experienced estate planning attorney can answer questions and guide you through the estate planning process.