A Living Trust Can Help You and Your Heirs
- Living trusts can offer flexibility and peace of mind.
- They can be helpful for those with assets in more than one state since living trusts not subject to probate court.
- A living trust can only protect assets once they've been transferred to it.
Most financial advisors will tell you it's important to plan now for the orderly transfer of your assets after your death, and that the earlier you plan the better. But let's face it, most of us aren't terribly eager to plan for our own demise.
Talk of wills can conjure up images of musty old documents with a flock of potential heirs contesting the contents. Trusts may bring to mind dreary contracts that lock up money for years and years, then dole it out in miserly fashion.
Regardless of your perceptions, there's one type of trust—a revocable living trust—that can benefit you during your lifetime and, upon your death, help ensure that your assets go directly to the people you've designated.
What is a living trust?
A living trust is a private contractual agreement that specifies how your assets will be distributed at the time of your passing. It becomes effective at execution, and because it's a private agreement, it's not subject to probate court. Another important distinction is that a living trust only protects the assets that have been transferred into it.
The initial cost of setting up a living trust may be more than for a will, but in the long run a trust may save you in other ways, not least of all by giving you peace of mind. And with a revocable living trust, you generally retain the right to move assets in or out of the trust at any time.
The best way to understand why you need a living trust is to look at what happens without one. If you die without leaving instructions for the distribution of your estate—either through a will or a living trust—the fate of your assets will be determined by state laws and attorneys, rather than by your wishes. Your assets may go to the people you wish them to, or they may not.
Wills have their limitations
Traditionally, wills have been the primary tool that people use to distribute assets according to their wishes. But wills have some major limitations.
First, a will must go through probate, the legal process used to value your estate, settle any debts, pay taxes and transfer assets to your heirs. Depending on where you live, probate can be costly and time-consuming—exactly what your family doesn't need when dealing with the loss of a loved one.
Second, a will is a public document, subject to scrutiny by anyone who wishes to know its contents. If someone feels they have been treated unfairly, they can contest the will. Even if they fail to break the will, such challenges can tie up your assets for months or even years, and cost your estate thousands of dollars in legal fees.
A living trust offers additional advantages
A living trust helps you avoid these problems and offers a level of flexibility and control that a standalone will cannot. Assets held in a living trust are not subject to probate, which means they go directly and immediately to your heirs upon your death. Because living trusts are private documents, they are generally more difficult to challenge than a will.
With a living trust, you transfer ownership of some or all of your titled property (which can include investments, real estate, bank accounts and vehicles) and personal property (for example, jewelry, antiques or furniture) from your name to that of the trust.
After you transfer the assets, you maintain the same access to and control over them as you did before you put them in the trust. You can buy, sell and trade assets, and freely move assets in and out of the trust.
You lose nothing, but you gain the assurance of knowing that your wishes will be carried out if something happens to you.
You don't have to put all your assets into the trust, although many people choose to do so.1 Just remember that any assets outside the trust may be subject to probate and public scrutiny. Many people use a living trust and a "pour-over" will together, to be sure all assets are included in the trust at death.
Setting up a living trust
Establishing a living trust can be relatively painless. There are tools online that can help you set up a living trust if you feel confident and comfortable handling it on your own. However, if your situation is complex, the terms of your living trust will be too. If you prefer some guidance, an estate planning attorney can assess your entire financial picture and draft the necessary documents. You'll likely need just a few meetings, and you may be able to minimize your attorney fees by being prepared. Think through the following questions before setting up your appointment:
- What assets do you want to transfer to your living trust? You can put in nearly everything you own or just a few valuable items. Make a list of the items you plan to include and bring recent statements for any bank, brokerage or mutual fund accounts you plan to transfer.
- To whom do you want your assets to go when you die? Keep your choices as simple and logical as possible.
- To whom do you want your assets to go if none of your primary beneficiaries are living at the time of your death?
- Who should act as trustee if you die or become disabled?
Armed with answers to these questions, preferably in writing, you'll quickly be able to provide much of the information your attorney needs to set up your new living trust. You'll walk away knowing that your assets will pass smoothly to your heirs should the unexpected occur.
I hope this enhanced your understanding of living trusts. I welcome your feedback—clicking on the thumbs up or thumbs down icons at the bottom of the page will allow you to contribute your thoughts.
1. Assets held in qualifying retirement plan accounts, as well as insurance policy proceeds, generally bypass probate, going directly to the beneficiary named in the account or policy. As a result, such assets are frequently not included in living trusts.
Talk to us about estate planning. Call 866-232-9890 or visit a branch near you.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.