There is a good chance that someone you know, perhaps a friend, family member, or financial advisor, has told you that you need a “Living Trust” rather than a Will. Are they right? Living Trusts have become increasingly popular estate planning devices and, in the right circumstances, they offer some significant advantages over a Will. Yet while most people have heard of a Living Trust, they often don’t understand if one is right for them.
1. What is a Living Trust?
All trusts (and there are many kinds) are simply legal relationships that involve three parties: the trustor, the trustee, and the beneficiary. The trustor transfers his or her assets to the trustee, who holds, manages, and distributes those assets for the benefit of the beneficiary.
A Living Trust is a trust you create to hold your assets for your own lifetime benefit. Thus, in a typical Living Trust, the trustor, trustee, and beneficiary are all the same person—you. If you become incapacitated, the trust names a successor trustee to take control of the assets for your benefit. Upon your death, the trust directs how the trust assets should ultimately be distributed, similar to a Will.
Another key feature of a Living Trust is that it is revocable, meaning you can “undo” the trust at any time and take all of the assets back. Because of this feature, Living Trusts are sometimes also called “Revocable Trusts” or “Revocable Living Trusts.”
2. What are the advantages of a Living Trust?
The primary advantage of a Living Trust is that it avoids probate. Probate is the process of administering and distributing your estate under the local court’s supervision following your death. Probate can be lengthy and expensive. Unlike assets in a Living Trust, assets passing under a Will generally must go through probate.
Keep in mind, however, the cost and difficulty of probate varies significantly by state. Probate in California, for example, is much more onerous than probate in Washington. In fact, Washington has a very streamlined and efficient probate process that requires minimal court involvement in most cases.
Living Trusts also offer more privacy than Wills. As part of probate, a Will must be filed with the court and becomes a document of public record. A Living Trust, however, does not need to be filed with the court.
One common misconception about Living Trusts, however, is that they save more estate taxes than a Will. This is simply not the case. Planning to avoid unnecessary estate taxes can be accomplished with a Will just as easily as it can be with a Living Trust.
3. What are the disadvantages of a Living Trust?
A Living Trust is often more expensive to set up than a Will, partly because it requires the additional step of transferring assets. In fact, a Living Trust only works properly if your assets are actually transferred into the Living Trust. For real property this requires deeds. For assets such as bank or investment accounts it requires account re-titling. If such assets are not “inside” the Living Trust when you die, they will have to be probated, defeating a fundamental purpose of the trust!
Living Trusts also require more periodic upkeep. Many people properly fund a Living Trust at the outset but, as the years go by, they forget to title newly acquired assets in the name of the trust and bring probate back into play.
Finally, Living Trusts still require post-death administration. Even though probate is avoided, there are still important administrative tasks to be done when you die whether or not you have a Living Trust, such as providing notice to creditors, filing appropriate tax returns, and possibly re-titling accounts and preparing deeds to transfer real property.
If you live in a state like California, a Living Trust may be the right estate planning tool for you. If you live in a state like Washington, however, where probate is not the burden it is in other states, a Will may be a simpler choice. In fact, many Washington residents end up choosing a Will. Even in Washington, however, there are times when a Living Trust may be a good idea. For example, if you live in Washington but own out-of-state real property, a “mini” Living Trust to hold the out-of-state property, combined with a Will for your other assets, may be the perfect solution.