Among the many ways to build an estate plan and prepare for the inevitable, the trust is arguably one of the more complicated options. A trust involves creating and legitimizing a legal agreement between two individuals for the benefit of a third, effectively creating an entity that temporarily possesses ownership over your properties and assets, both for tax purposes and to ensure a smooth inheritance process. This creates a lot of questions. The first, of course, is why bother?
The answer to that question is that estate planning is the difference between a long list of legal hassles and paperwork following the death of a loved one, and a peaceful process of grieving without having to worry about assets, properties, tax costs, and disputes. Wills can get the job done to a degree, but there is a reason trusts are often preferred. Only about a third of the adult American population has set about to create an estate plan for themselves, for when they pass away, even though estate planning is not something reserved only for the wealthy or perpetually retired.
This means most people do not realize the importance of preparing for that terrible day, regardless of when it might come. If you ever thought of setting up your estate plan, then you are bound to have come across several different options – and if you were ever interested in setting up a living trust, then you are bound to have some of these questions in mind.
Explaining, Understanding Living Trusts
A living trust is a type of trust specifically set up to go into effect while you are still alive. This type of trust effectively removes you as the technical owner of all properties funded into the trust – however, in most cases, you retain control over said properties as an indirect owner, due to your status as grantor, or trust author.
That control naturally ceases to be when you pass away, at which point the trust and its contents are taken over by the trustee, a person you appoint to ensure that the contents of the trust are distributed to their rightful beneficiaries as you saw fit. Trustees are either independent (professional, hired to oversee the inheritance process) or dependent (typically a family member).
Is Hiring a Living Trust Attorney Necessary?
The only thing needed to set up a trust is the trust document, a trustee, notarization from the state, and an amendment to your various properties to ensure they are funded into the trust. However, that does not mean you are all set. That first step – creating the trust document – is the most crucial.
Online templates are rarely if ever comprehensive, and almost never state-specific, making the incredibly unreliable ways to set up a trust. The same goes for anything bought specifically from an “online service”. Instead, it is safest – and smartest, if you want to avoid countless fees and problems – to consult an estate planning professional to advise you and guide you through the creation of your trust.
Wills vs. Trusts
A last will and testament goes into effect when you pass away, serving as a document that describes what you want done with your property. A will has to be written and signed in front of witnesses, and notarized, to be valid. Deathbed wills, holographic wills, and nuncupative wills are allowable under certain circumstances but certainly not recommended.
A living trust, on the other hand, goes into effect as soon as the trust document is created, which is useful for tax purposes, for example. Unlike a last will, a living trust also protects any property funded into the trust from probate – which, with a comprehensive trust, should be everything you own.
Many objects under a certain value (typically $25,000) are automatically funded into your trust if it possesses a tangible personal property clause or form, including things like furniture and clothing, especially if they are part of your home. Trusts also give you the option of transferring your interest in a co-owned property to your children. You cannot place co-owned property in a will.
Aside from bringing more options to the table regarding what can be placed in your estate and how it can be given over to your children, a trust cannot be disputed in the same way that a will can. There are ways to challenge a living trust, but they are much more complex and rarely succeed. Take care not to mix up living trusts and living wills – these are very different documents.
Legal Document Preparation Costs
The cost of a living trust generally mirrors the size and nature of your estate. Highly complicated estates often require highly complicated estate plans, and that can cost more than a straightforward list of properties and beneficiaries. Finally, outside of the legal fees accrued to create a will and a trust, trusts are generally more expensive to maintain.
Both a trust and a will have to be carried out – someone you appoint must go about accounting for every item in the estate, and then distributing it to its rightful beneficiary. Larger estates take more time to distribute, which is more expensive. Some trusts are meant to last for years, provisionally giving funds to a beneficiary rather than doling out a sole sum all at once.
Other trusts, such as special needs trusts and pet trusts, are designed to provide financial aid over years and decades. These are more expensive to maintain than a will would be. Again, the exact answer is simply that it depends. It depends on many factors, but the general idea is that living trusts are more expensive than a will in most cases.
Transferring Your Assets, Funding Your Living Trusts
Here is a short list of what can and should be funded into a trust:
- Intellectual property, copyrights, patents, etc.
- Real estate (including mortgaged real estate and your portion of co-owned property).
- Investment instruments (including stocks, bonds, other securities, valuable art and vintage furniture, jewelry).
- Business interests.
- Valuable commodities (metals in particular).
- Valuable collections (anything applies, from coins to precious stones).
Here is what should not be funded into a trust:
- 401ks, 403bs, IRAs, and qualified annuities.
- Life insurance (assign a beneficiary instead).
- Property that is transferable upon death (does not go through probate).
Note that there are times when it is tax advantageous to fund these accounts into a trust. Consult a local professional to see if this may be the case for you.
Do You Need a Living Trust?
This is perhaps the most common question asked after understanding how living trusts work. And the answer depends highly on the individual, and their circumstances. If the value of your estate exceeds $150,000 and you live in the state of California, then chances are you will want a way to skip probate. A simple living trust will most definitely help you do that, without racking up a fortune on bills and costs.
On the other hand, you can use certain measures to reduce the total value of what goes through probate, through select transfer-on-death properties and payable-on-death accounts. In some cases, that might be enough to help you seek expedited probate.
There are many nuances, exceptions, considerations, and tricks that can help you create an estate plan built to transfer as much of your wealth over to the next generation with as little cost as possible. But if you plan to set up your estate, be sure to discuss your options with a local estate planning professional. Even if you wish to do your own estate planning, it is imperative that you consult with an estate planning professional.