Do I Need a Trust?

A trust might sound like something only a very wealthy person needs, but a living trust is a common estate planning tool more and more people are becoming interested in because of the benefits it can offer.

What is a Trust?

In general, a trust is a legal vehicle that is given ownership and control of assets. A trustee manages the assets until they are distributed to the beneficiaries of the trust. The trust contains instructions for when the assets will be distributed to the beneficiaries in the future. There are many kinds of trusts for various purposes: charitable trusts, special needs trusts, spendthrift trusts, and Totten trusts. The most common kind is a living trust.

The most important general categories of trusts are revocable and irrevocable trusts. A revocable trust can be changed or altered. An irrevocable trust can never be changed and once the assets are placed in the trust it cannot be undone.

How a Living Trust Works

A living trust is a revocable trust you create during your lifetime as part of your estate plan. A trust document is signed, setting up the trust and naming the trustee and the beneficiaries of the trust. You can name yourself as the trustee or you can choose your spouse or someone else you trust.

Next, you transfer ownership of your assets into the trust, by changing titles, deeds, and bank account names into the trust’s name. This step is very important, because the trust cannot take effect until the assets are actually transferred to it.

The characteristic that makes a living trust unique (and so popular) is that you can continue to use and spend your trust assets throughout your lifetime. Even though the trust technically owns them, you will go about your life as you normally would and there are no restrictions on how you use your money or property. After you die, the trustee (or alternate trustee if you were the main trustee) distributes the remaining assets according to your wishes.

Benefits of a Living Trust

Living trusts have a variety of benefits that make them a popular estate planning choice, including:

• They're very simple to set up
• The terms of the trust remain completely private and are generally never revealed to anyone outside of the trustee and beneficiaries
• Assets placed in the trust pass via the trust and do not go through probate, so there is no court supervision or interference with your plan
• Because the assets do not go through probate, it reduces your estate’s legal costs
• The trust gives you the freedom to distribute assets after your death at the times and under the circumstances you choose (such as when your children reach age 30 or graduate from college)
• Trust assets can be distributed immediately after your death if you wish, with no waiting time, unlike with probate
• Should you become incapacitated, the trust is already set up and the trustee will manage all of your assets for you
• You can change or revoke the trust at any time without restrictions

Drawbacks of a Living Trust

While living trusts provide a variety of benefits, there are some drawbacks to keep in mind:

• Although trust assets avoid probate, they do not avoid estate tax, so a living trust cannot help you avoid or reduce estate taxes
• There are recordkeeping requirements because you don’t own the assets yourself anymore, creating a layer of administrative tasks when you want to use assets
• Some states impose a transfer tax when you transfer real estate into a living trust
• Refinancing real estate owned by a trust can be a complicated process
• After you die, there is no cutoff as to when creditors can seek reimbursement from the trust, unlike when an estate is probated and all claims must be settled during the probate process
• If assets are not properly transferred to the trust, they will go through probate, complicating your estate
• Although you intend to place all your assets into the trust, you still should have a will (called a pour over will) that transfers any overlooked assets into the trust. If you have minor children you will also need a will so you can name a guardian for them.

Who Needs a Living Trust?

Any adult can set up a living trust. Living trusts are generally helpful for anyone who has more than $200,000 in assets (less than that and the costs outweigh the benefits); however, there are some people who are happy to pay the cost to avoid probate on a more modest estate. If you have concerns about privacy and do not want your assets, beneficiaries, or private business to become public record, a living trust can give you the privacy you need. Additionally, if you feel strongly that you do not want court oversight of your estate, a living trust provides that shield.

How Do I Get a Living Trust?

The best way to get a living trust is to work with an estate planning attorney who can ensure that your trust document meets all of your state requirements and who can help oversee the transfer of your assets. You can also choose to use an online trust preparation service. Expect to spend $300 or more, which will vary depending on the complexity of your situation.

Living trusts provide a level of control and security that you may not be able to obtain with just a will. Talk to an attorney to find out if a living trust is beneficial for you.*

When you're ready to plan for the future, download our Savvy Guide to Estate Planning. Our free guide takes the fear and worries out of creating an estate plan and tells you what you need to know to get it done. Download your copy here.

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* This content is developed from sources believed to be providing accurate information. The information in this material is not intended as legal advice. Please consult legal professionals for specific information regarding your individual situation.