It’s never too late or too early to start thinking about what will happen to your estate and your assets after you pass away. Setting up a will or a trust is one of the most important things we can do before we pass away. Remember, after you’re gone your family and loved ones will need time to grieve, so ensuring that everything is in order with their inheritance will take a lot of stress off their shoulders during a very difficult time.
If you’re also worried about how your beneficiaries will manage their inheritance, setting up a revocable living trust may be your best option.
Before we get started, if you’re unsure about the difference between a will and a trust, check this article out.
Establishing the Living Trust
A revocable living trust is just one of many types of trusts, but it’s one of the more popular and widely used ones precisely because it covers a vast array of concerns for many seniors. Basically, it is a written agreement through which you, the creator or grantor of the trust, can appoint a trustee to administer and manage your estate. The trustee will ensure that your beneficiaries will receive their portion of their inheritance after you pass away.
The trustee can be any competent adult of your choice, but you may also appoint a bank or a trust company instead. You may include bank accounts, real estate, or investments to your trust. You’ll still retain control of them but they won’t actually belong to you anymore- they will belong to the trust. Because it is a ‘revocable’ living trust, you will also be able to change or amend the trust over the course of your lifetime, whenever you want.
Since your assets now belong to a trust, after you die your family and loved ones do not have to go through a probate court in order to gain access to them. That also means that they won’t have to worry about extended court visits, court fees, or attorney fees.
Advantages of the Living Trust
Setting up a living trust can be extremely beneficial both for yourself and your beneficiaries. There are plenty of advantages you have to take into account and, for the most part, these push many Americans to go this route.
Avoidance of Probate
As mentioned earlier, by setting up a revocable living trust your loved ones can avoid probate court altogether. This is typically a multi-step process that involved not only court fees but also attorney fees.
By essentially skipping this step, your assets will be transferred directly to your beneficiaries. Furthermore (and linked to this advantage), assets in your trust will take precedence over the property designated in your will.
By doing this you will ensure that your family and friends won’t have to go through painful and stressful steps on top of the sadness of losing you.
Changeable and Flexible
You can essentially make a trust whenever you wish to and you shouldn’t feel any constraints when it comes to changing any of the details.
The flexibility of trusts makes it easier to add or subtract assets. Any amendments you make will be at your own discretion.
For most people, keeping an estate out of the public record is an important factor when they’re trying to figure out how to divide their inheritance. That’s one major benefit of opening a trust instead of making a will.
After you pass away your loved ones will have to go through probate court if you leave a will behind, meaning that all your assets will be documented and free to view by anyone. Since going with a trust means skipping court altogether, you don’t have to worry about your private and personal stuff making it out into the public.
Eliminate Challenges to the Estate
As much as we hate to think about it, sometimes even the happiest of families dump into trouble when it comes to dividing an inheritance. Wills basically allow anyone who feels they’d been ‘wronged’ to dispute or challenge your decisions after you pass away.
Luckily, a trust will allow you to disinherit anyone that you think might cause such problems.
Segregation of Assets
If you and your spouse bought property or assets before your marriage then you’d have the right to separate those assets in your trust. These documents give you the option of giving your goods to a beneficiary or beneficiaries without posing a problem to your spouse’s properties.
Assignment of Durable Power of Attorney/Guardianship
Are you worried about how a guardian will handle your assets and how they’re going to look after your minor children after you are gone? With the help of a trust, you may control their spending habits so that they will benefit the child, not themselves.
Furthermore, you may appoint someone to make decisions for you if you become incapacitated, such as if you become disabled or impaired.
All of this is done without needing to obtain durable power of attorney, an often long, arduous, and complicated process.
A professional trustee can help manage your property by allowing your wealth to grow for multiple generations. You’ll still be in control of how this is managed, but you can rest assured that the people behind these tasks are professional and will offer you continuous support.
Estate Tax Minimization
Sadly, setting up a trust doesn’t mean you’ll automatically minimize taxes, so you’re going to have to add certain provisions that will help you establish a credit shelter trust. What this means is that you’ll be able to reduce estate taxes for large estates in case they exceed the combined estate tax exclusion amounts.
Disadvantages of the Living Trust
Just because trusts sound like the safest, easiest way to transfer your estate to your beneficiaries doesn’t mean there aren’t any disadvantages you shouldn’t consider. Looking at the bigger picture can help you decide if this is the right move for you, your family and friends.
Expense of Planning
Drawing up a will can cost you around $150 whereas setting up a trust will land you in the ballpark of $2,000, if not more. Then again the hefty price tag does come with added benefits that you simply wouldn’t receive if you were to make a will instead.
On the other hand, many have argued that court and attorney fees should be taken into account while going through probate court. Some have even estimated that these may come up to 2%-4% of your estate, in some cases.
Furthermore, you must re-title property in the name of the trust after the documents are established. This is an added inconvenience that takes time and, in most cases, requires the payment of a number of fees.
Finally, you must also keep administrative expenses in mind. If you appoint a trust company or a bank as your trustee, you must pay trustee and investment advisory fees as well.
Maintaining Trust Books and Records
The information on your trust won’t update automatically, not even when it comes to huge life changes like marriage, divorce, or the birth of a child. So once you set it up you can’t forget about it as it’ll need constant fine-tuning.
It is recommended that you update your trust on an annual basis at least. It is an added inconvenience, to be sure, but it is necessary.
Minimal Asset Protection
The most surprising downside is the fact that these trusts actually offer very little asset protection if you retain an ownership interest. So, even if you’re naming yourself as a trustee, it might not be as advantageous as it sounds.
No Tax Break
No, you can’t dodge taxes when you set up a trust. You will incur taxes on your asset gains or income. These assets will also be subject to legal action and creditors. Trusts shouldn’t be considered a safe place to ‘hide’ your estate from Uncle Sam.
Issues can spring up at any moment, and they can be exacerbated if you fail to educate your spouse on the terms and purpose of the trust. You may bump into issues if your estate includes real estate in other countries. Title insurance and Subchapter S stocks have also been known to give a lot of people headaches.
Above all, you must arm yourself with a lot of patience when taking these steps.
The Bottom Line
If you’re looking for added flexibility and privacy, then you should look into establishing a trust. Passing your estate on will be easier on your beneficiaries after you pass away, but that’ll also mean that you’ll be required to put in more time and effort into making sure your trust is up to date while you’re still alive.
It’s always recommended that you speak to a professional, as it may be that you only need a will for your specific familial circumstances. If you do decide to establish a trust then don’t expect that you’ll be able to do it all on your own and make sure to employ legal help that can help soften the process up.
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