There are many estate-planning tools that are available to make the transition of assets from beyond the grave a much smoother process. It’s important to fully understand all of the options available so that there is clear guidance on what is to happen with your belongings after death.
One of those tools is a living trust, which is also often called a revocable trust. A living trust is a legal document that is drafted with the purpose of naming the beneficiaries of assets that will be executed once an individual passes away.
Table of Contents
How do living trusts work?
A living trust is drafted while you are alive, and it is a document that outlines who is to inherit property, as well as who is to manage that property after your death. One important aspect of living trusts is that once you draft a living trust, the assets that you include are now property of the trust.
This means that technically, you are no longer the owner of your assets, although as long as you are living you are the manager of these assets.
Another important aspect of living trusts is that drafting one will prevent the need to go to probate court. This is because they are private documents and do require any court orders or oversight. This is true regardless of where you live.
That being said, trust laws differ by state, and some states approach trust laws in ways that seem better than other states. If you are moving from one state to another, it is best to revisit your documents and see what you will need to do to bring them into compliance.
What’s the main purpose of a living trust?
The main purpose of a living trust is to provide the draftee with greater control over management of their assets in the event of death. The instructions set place in a living trust are exceptionally detailed and they provide more flexibility, dependability, and creativity then what a standalone will can provide.
An example would be that in a living trust, you might not only decide who is to retain possession of your assets, but at what age. In addition, you might also specify who to keep your assets away from – let alone who to give them to. If there is anyone that you would like to prevent from receiving your assets, even if that includes credit companies or your in-laws, you can do just that with the help of a living trust.
Benefits of a living trust
As stated, one of the major benefits of living trusts is that they give you more control over your assets. They can be used as an additional or standalone tool while planning your estate and there are several other benefits of utilizing them that not only affect you but your loved ones as well.
Avoid Probate Court
Probate court is a section of the judiciary system that handles matters such as wills, conservatorship, and guardianship. If you draft a living trust, you can completely avoid this process, which may mean saving 2% to 4% of your estate in the long run. In some cases, it can be even more!
Protect loved ones
Avoiding probate court also means avoiding elongated processes that can take place due to members of the family squabbling or arguing over possessions. Family members may have to spend an inordinate amount of time traveling to and from court hearings when in reality their time would be best suited handling other affairs.
Another important advantage of living trusts is that they can protect your privacy. Once legal documents go to probate court, they become public records. This means that anyone and everyone that wants to view them has the ability to do so. Drafting a living trust will prevent that from happening.
Downside to a living trust
Though there are many benefits to a living trust, there are several downsides as well. In most cases, the benefits heavily outweigh the downsides. Some downsides are mere annoyances while other situations may arise when it actually makes sense to have the estate go through probate court.
Hassle of Paperwork and Titling Ownership
Paperwork for living trusts isn’t exactly difficult, but it can be very tedious. Items that you would want to specify special directions for will need ownership titles. That means that anything with a substantial value, including jewelry, automobiles, or musical instruments among other things, would need to have a title. If a title ownership document doesn’t exist, you can place it on a document called an assignment of ownership.
Transfer Tax and State by State Law Differences
Some states have better laws when it comes to living trusts. This is especially true when it comes to taxes. For example, in most states a transfer tax is not applicable when it comes to transferring ownership of your real estate to a living trust. However, in some states, a transfer tax will apply.
Finding a Lender to Refinance a Trust Property
In some situations, it may prove difficult to refinance a real estate property if the ownership is attributed to a trust rather than in your name. It’s usually possible to find a mortgage lender that will work with you, but it may require you to do a bit of shopping around for different options. If you cannot find one you may in fact need to transfer it back to your name.
Creditors Can Lay Claims to Property
Something to take into consideration is how much debt you have accumulated. If the debt is smaller, in most situations this is not a serious issue and living relatives will pay it down – meaning avoiding probate court will still be well worth it. If the debt is large however, it actually may make more sense to have the estate process run through probate court.
How much does a living trust cost?
The costs of a living trust can be anywhere from $250 to $2,000 in total, depending on the route you take. Living trusts can be drafted simply online, or through an attorney. For example, you can use an online service such as LegalZoom and have one created for under $350 dollars.
The costs also vary depending if you are creating a document individually or as a married couple. For individuals, a living trust can cost anywhere between $1,000 – $1,500 if you choose to go through an attorney. For married couples the costs are usually between $1,200 and $1,700 but it can be as high as $2,700 in some cases.
Living trust vs will
Wills and living trusts are both estate-planning tools that designate who is to receive your assets (as well as manage them) after you die. Sometimes it may make sense for both documents to be drafted.
The major difference between a living trust and a will is that your estate will go through probate when a will is executed and a living trust avoids this process. That means that wills will be on the public record once it goes through probate court, which is viewable by anyone, but a living trust will not be. There may be some reasons that you want the estate distribution to be handled by the courts, like if you have a large debt, however many times people choose to avoid this.
How do I create a living trust?
Creating a living trust can be extremely easy. Anyone can create one online through tools like LegalZoom, which can handle things like securing title ownership and managing revisions. In some cases, they’ll even get reviewed by an actual attorney.
That being said, living trusts drafted by lawyers do tend to be more detailed, and it may make more sense if your living trust is somewhat complicated or if you are just looking for a more thorough process.
Consider all factors involved
Remember that living trusts affect both you and your loved ones. Knowing about the benefits of living trusts can help protect you and loved ones from unnecessary elongated processes.
If the idea of a child driving to and from court for long periods of time after your death is something that looks like a real possibility, you may want to consider drafting a living trust either instead of or in addition to a will.
Is it expensive to set up a living trust?
Living trusts are relatively inexpensive and can be done for under $350 in some cases. If you choose to use an attorney the costs will be higher but more thorough.
How do I make my own living trust?
You can make your own living trust by using an online service like LegalZoom or a template to draft your own.
Are living trusts a good idea?
Living trusts can be a good idea for those that want to avoid the estate distribution process from going through probate court. They can save both time and money.