The main benefit of living trusts is the avoidance of probate. Not only are probate records open to the public, an AARP survey finds it takes an average of 18 months to distribute an estate that must go through probate. Additionally, around 5% of the estate could be taken for probate administrative costs (including court fees). Living trusts help ensure a smooth transition of assets, since no court supervision is required. They don’t save you anything while you’re alive—they are often a bit more complicated to set up and cost more money to initiate—but they can save your beneficiaries countless headaches, days and months of waiting, and potentially a fair amount of money.
Here’s how it works:
In a revocable living trust, you fund your trust with most or all of your assets. You can name yourself as the trustee (in addition to your spouse, if you choose) and you can do whatever you like with your assets for as long as you live, as long as you remain mentally competent. You can even change or dissolve the trust at any time, if you like. The trust only becomes irrevocable when you pass away, and you can make provisions for a successor trustee to take over in your place. Your trust can also be written in a way that will automatically pass along your assets to your chosen beneficiaries or be portioned out over time and in amounts you choose.
A living trust can be a wonderful tool, but there are also a few caveats to consider:
1.) A living trust does not reduce taxes, only probate fees. Of course, a good attorney can always draft the trust to include some tax-saving provisions, but there are no income or estate tax advantages for a living trust. It does, however, let you avoid the cost of a second-state probate for out-of-state property.
2.) You should also consider a “pour-over” will in addition to the living trust. If you accumulate new assets after you set up your trust, a pour-over will can move your new assets into your trust upon your death. Your new assets will then be handled according to the trust’s guidelines.
3.) There is more paperwork involved to set up a living trust, since the trust becomes the legal owner of your assets (even though you maintain control of them). After you move things into your trust, however, things proceed as normal.
4.) You should not try to prepare a living trust on your own with do-it-yourself kits. Have an attorney prepare it for you, as it can be complicated and each state is a little different. After the trust is set up, though, you do not need to see your attorney when your assets change.
Living trusts aren’t for everyone, because of the additional expense and time involved. However, if you have a complicated or a large estate (or if you just wish to avoid probate), a living trust could be a great solution to your estate woes.