The Benefits of Revocable Living Trusts
In their estate plans, many people now choose to set up a revocable living trust instead of relying on a stand-alone will, beneficiary designations, or joint ownership.
What Is a Revocable Living Trust?
A living trust is an estate planning tool that can be used to protect your assets and transfer your wealth to the next generation. When properly prepared and funded with your assets, it can provide many benefits for you and your loved ones.
A living trust is also referred to as a revocable living trust; that is, you can modify it during your lifetime. You also still own and have control over the assets in a revocable living trust while you are alive. This is in contrast to an irrevocable trust, which takes over ownership of the assets that are placed into it.
How Does a Trust Work?
You must transfer assets into a trust. This is known as funding a trust. For each asset you want to transfer, you must change the title from your name to the name of the trust.
Only certain types of assets should be put into a trust. For example, you typically would not place your retirement accounts or health savings accounts in a trust.
Note, too, that the rules for what can go into a trust may vary across states. In California, for instance, you would not place a motor vehicle in a trust. Meanwhile, in Arizona you may be able to do so if you no longer owe money on the vehicle.
You also will appoint a trustee for the trust. The trustee can be an individual or an organization. In part, they are responsible for distributing the trust assets according to your wishes. Learn more about the duties and responsibilities of a trustee.
Assets in a trust can be distributed to beneficiaries during your lifetime, when you pass away, or at some point in the future. While a will takes effect when your death, a trust becomes effective when you have it created.
The Advantages of Revocable Living Trusts for Your Heirs
In addition to offering more flexibility and control than an irrevocable trust, a revocable of a revocable living trust benefits your loved ones.
A living trust:
- Avoids the time and expense of probating the assets held by your trust when you die
- Avoids multiple probates if you own real estate assets in more than one state
- Provides easier, more efficient administration of your estate
- Prevents court interference after your death or in the event that you become unable to handle your own affairs
- Gives you and your family maximum privacy by avoiding public court processes
- Minimizes emotional stress on your family
- Brings all of your assets into one plan controlled by one set of instructions
- Prevents inadvertent disinheriting
- Makes it easier to make equitable (fair) distributions to your beneficiaries
- Lets you keep assets in the trust until your beneficiaries reach the ages at which you want them to inherit
- Can continue longer to provide for a loved one with special needs
- Enables assets to remain in the trust, protecting them from beneficiaries’ creditors, spouses, divorce proceedings, imprudent spending, and future death taxes
- Prevents the court from controlling the inheritance of minor children
- More difficult than a will to contest
- Provides effective prenuptial protection
- Can be changed or canceled at any time while you are competent and alive
- Allows for professional asset management if you choose to have a professional trustee
- Can include tax planning to reduce or eliminate state and federal estate taxes
- Lets you keep maximum control while you are living (even if incapacitated) and after you pass on
- Provides peace of mind
Is It More Expensive to Set Up a Trust Than a Will?
It will probably cost more initially to set up a well-drafted living trust than to have just a stand-alone will prepared. One reason is that a living trust usually has more provisions because it deals with issues while you are living as well as after you pass on. A a will only deals with issues after have died.
When comparing costs, remember that the true cost of a will includes the following:
- the costs of probate when you pass on,
- a possible conservatorship if you become incapacitated, and
- a guardianship if you leave assets to minor children.
Should I Be Aware of Any Other Disadvantages of a Revocable Living Trust?
Besides the extra expense of setting up a living trust, they can have a few other potential drawbacks:
- For one, assets within a revocable living trust may not be safe from creditors.
- If you have a professional trustee, there may be additional costs associated with administering the trust.
- When establishing a trust, you also need to remember to transfer into the trust the assets you wish to pass on to your heirs.
Let’s say you acquire a new asset after initially setting up the trust. However, you forget to update its title document to reflect the name of the trust before your death. That asset may then be subject to probate. Learn more about how a pour-over will may be a good safeguard in such a case.
Consult With an Estate Planning Attorney
After weighing the costs and benefits, it is easy to see why so many people and professionals prefer a living trust. Reach out to a qualified estate planning attorney near you to pursue the plans that are right for your circumstances.