A living trust is a legal document you set up while you’re alive to ensure that the assets you put in the trust, such as real estate, stock and bond holdings, CDs, and jewelry, are distributed in the way you want after your death without your beneficiaries having to go through court probate to receive the assets you pass on to them. It can be an essential part of estate planning.
A key benefit of a living trust, also known as a revocable trust, is you retain control of your assets and property in the trust during your lifetime. You can make changes to the trust, such as including a newborn as a beneficiary, adding or removing assets, or making changes as to who gets what.
This type of estate planning tool, though, also allows you to name a third party, known as a trustee, to manage and make decisions about assets in the trust on your behalf when you die or if you’re unable to do so due to illness or injury. The trustee, who acts as a fiduciary, distributes the proceeds of the trust to your beneficiaries based on your wishes.
“A living trust is really a shell in which you place your assets so that when you become incapacitated or pass away, your wishes are respected,” said Harry Drozdowski, senior wealth planning strategist at Wells Fargo.
What are the benefits of a living trust?
Avoiding Probate. Assets held in a living trust can be distributed to beneficiaries without the need to go through the court system, a process known as probate. This legal procedure, in which the court validates a deceased person’s will, is time-consuming, as probate typically takes months and can last years. Probate also comes with costly attorney and court fees. Avoiding probate by drawing up a living trust ensures that your assets are passed to beneficiaries more easily, quickly and privately.
Preserving Privacy. Another perk of a living trust is that avoiding probate means your financial affairs will remain private and out of public view. In contrast, a will, which must pass through probate, becomes part of the public record, which means your nosy neighbor can find out how the estate was divided up and who got what.
Preparing for Incapacity. With folks living longer, it’s increasingly important to prepare ahead for any unexpected physical or mental issue such as brain trauma or dementia that makes you unable to manage your own affairs. Having a living trust in place ensures that your trustee will distribute your assets as you specified in the trust and in the best interests of your beneficiaries.
“Living trusts are a very efficient way to leave money to your family or people you care about because it protects those assets,” said certified financial planner Brad Bernstein, a managing director and senior portfolio manager at UBS Wealth Management. “It puts a layer of protection around your assets for when you’re no longer here, and it avoids probate and keeps your business confidential.”
How do you set up a living trust?
To get the ball rolling, meet with an attorney specializing in estate planning. To create a living trust, you’ll need to choose a trustee, typically a person or professional you trust that you want to settle your affairs. Next, create a list of assets that you want to transfer to the trust and leave to loved ones, charities or other beneficiaries. Specify who the beneficiaries are and what assets you’re leaving them. Finally, and this is important, fund the trust by transferring the title of assets to the living trust.
Keep in mind that some assets are better to inherit than others. Read up on both the best assets to inherit, as well as the worst assets to inherit.
“If something’s not in there (the trust),” said Drozdowski, “the trustee will be unable to manage those assets.” Let’s say, for example, you have a disabled child, and you want the trustee to manage the money you leave behind for their care after you pass away. If the investment account isn’t listed and funded in the trust, the trustee is unable to make legally binding financial decisions for your child.
Oftentimes, the person creating the living trust goes through the entire process but fails to fund the trust. The downside? When they die, the assets that were supposed to be protected by the living will instead fall under the provisions of the will.
“You lose all the benefits of the living trust (if you don’t fund the trust),” said Bernstein.
What are the downsides of a living trust?
Despite the many estate planning benefits of a living trust, these legal documents do come with limitations. A living trust, for example, won’t help you reduce your estate taxes, says Drozdowski. Nor will it enable you to sidestep all legal fees, as there are costs involved in drawing up the document.
And, if you do create a living trust and dot all the I’s and cross all the T’s properly, make sure you alert someone as to the purpose of the document and where it is housed. “Don’t put your living trust in a safe somewhere that nobody (including the person you named as the trustee) knows about,” said Drozdowski. “That becomes a bit of a snafu.”
Instead, be sure to let the people mentioned in the trust know that you’ve set one up.
“Tell the kids, ‘we’ve done a revocable trust and here’s what it means, and here’s who the trustee is going to be,’” said Drozdowski.
