A Living Trust Can Help You and Your Heirs

March 24, 2004

Rande Spiegelman
CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research

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.

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 living trust, you—as trustee of the trust—are generally free to move assets in or out 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 will alone 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.* 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. While there are do-it-yourself living trust software packages and Web sites, this can be a complex process. You should consult an estate planning attorney to help you 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. Before meeting with your estate attorney, think through the following questions:

• 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. And you'll walk away knowing that your assets will pass smoothly to your heirs should the unexpected occur.