Do I Need a Living Trust?

What is a living trust?

A living trust (also called a revocable living trust) is a legal document that holds your assets for your benefit during your lifetime and transfers them to your chosen beneficiaries after your death. You create the trust as the "grantor," and your designated "successor trustee" manages the transfer. They may also step in to manage your affairs without court intervention if you become incapacitated.

A living trust can be canceled or can have its terms changed by the grantor at any time.

Managing incapacity with a living trust

One of the most valuable features of a living trust is how it protects you if you become unable to manage your own affairs. If you're incapacitated due to illness, injury, or cognitive decline, your successor trustee can immediately step in to handle trust assets. They can take care of tasks such as paying bills, managing investments, or maintaining property without going to court.

• This transition typically happens when a physician (or sometimes two physicians, depending on your trust's terms) certifies that you can no longer manage your financial affairs.
• The transfer is private and seamless. Your successor trustee presents the medical certificate along with the trust documents to financial institutions.

Though a durable power of attorney also grants someone, the authority to act on your behalf, financial institutions sometimes resist honoring these documents.

A living trust often faces fewer obstacles because the successor trustee isn't acting on your behalf—they're managing trust property they're already authorized to control. The trust then continues uninterrupted from your incapacity through to your death, providing consistent management of your assets throughout.

Benefits of a living trust

There are some very good reasons to include a living trust in your estate planning:

• Avoid probate. Probate is the court-supervised process of distributing a deceased person's estate, and it can take upwards of two years while consuming as much as 10% of an estate's value. Assets in a living trust transfer outside probate, which can mean faster delivery of inheritances with no additional costs.
• Maintain privacy. A living trust is a private document that never becomes part of the public record. Unlike a will, no one can search to find out what you left to whom through the trust.

Key aspects of a living trust to make an informed decision

Living trusts offer significant benefits. Though there are some challenging aspects that must be understood in detail to make an informed decision about whether a trust is the right choice for your situation.

• Higher upfront costs: Creating a living trust typically costs significantly more than drafting a will. Attorney-prepared trusts often range from $1,000 to $3,000 or more, compared to $300 to $1,000 for a will.
• Time-consuming setup: Beyond creating the trust document itself, you must "fund" the trust by retitling assets in the trust's name. This means updating deeds, changing account titles, and coordinating with multiple financial institutions—a process that can take weeks or months.
• Ongoing maintenance: Whenever you acquire new assets, you need to title them in the trust's name or update your pour-over will. Forgetting this step means those assets could still go through probate.
• No tax benefits: A revocable living trust provides no income tax or estate tax advantages during your lifetime. You'll still report all trust income on your personal tax return, and assets remain part of your taxable estate, subject to the $15 million per-person federal exemption.
• Still need a will: Even with a comprehensive living trust, you'll need a pour-over will to handle assets outside the trust. This is most importantly to name guardians for minor children, which a trust can't do.

For some people, particularly those with modest estates or simple distribution wishes, these drawbacks may outweigh the benefits. The key is weighing the cost and complexity against your specific needs, such as privacy concerns, property in multiple states, or the desire to avoid probate for your beneficiaries.

How to create a living trust

It isn't particularly difficult to set up a living trust. The preliminary steps involve:

• Doing an inventory of your assets
• Deciding where you want them to go after your death
• Choosing someone to handle the trust should you be unable to do so either through death or incapacitation

To create a living trust, you can use living trust forms found online, or consult an experienced professional to ensure that you are doing everything correctly.

When it comes to "funding the trust" with your assets, you must be very careful. This entails ensuring that your assets are all titled in the name of the trust; otherwise, they won't be included.

Speaking of assets that aren't included, having a pour-over will is always a good idea with a trust.

• It will catch any property inadvertently left out of the trust and include it in the distribution.
• It will also save that property from being subject to state intestacy laws, which come into effect when someone dies without a will. Intestacy laws provide for distribution based on familial relationships, which may not match what you would have preferred.

Living trust costs and pricing

The cost of creating a living trust varies widely depending on how you go about it and the complexity of your estate. Here's what you can generally expect:

• Attorney-drafted trusts. $1,000 to $3,000 or more for an individual trust; joint trusts for married couples typically cost $1,500 to $5,000. Complex estates with business interests, multiple properties, or blended families can push costs higher.
• Online legal services. $100 to $500 for guided trust creation with document review and support.
• DIY templates. Under $100, you can achieve your goals while keeping the costs low with DIY templates. These would require extra vigilance, such as double-checking details.

What factors affect living trust costs and pricing

Several factors affect living trust costs and pricing:

• Your state (attorneys in major metropolitan areas charge more)
• Whether you're creating a single or joint trust
• The number of beneficiaries and trustees
• Whether you have complicated assets like business interests or real estate in multiple states.

Don't forget the hidden costs of funding your trust. You may need to pay:

• Recording fees for new property deeds (typically $50 to $200 per property)
• Notary fees
• Fees from financial institutions for retitling accounts

If you need to amend your trust later, attorneys typically charge $200 to $500 per amendment. When comparing to a will, remember that while wills cost less upfront, the required probate process can consume 3% to 10% of your estate's value.

What to include and exclude from your living trust

Not every asset belongs in a living trust. Understanding which assets to transfer and which to keep out is essential for effective estate planning.

Assets to include in your living trust

• Real estate (primary residence, vacation homes, rental properties)
• Bank accounts (checking, savings, money market)
• Brokerage and investment accounts
• Business interests (LLC memberships, partnership interests, stock in closely held corporations)
• Valuable personal property (art, jewelry, collectibles, vehicles in some states)
• Intellectual property and royalty rights

Assets to exclude from your living trust

• Retirement accounts (401(k)s, IRAs, 403(b)s). Transferring these to a trust triggers immediate taxation of the entire account. Instead, name beneficiaries directly on these accounts.
• Health savings accounts (HSAs). These can't be owned by a trust and must use beneficiary designations.
• Life insurance policies. While you can name a trust as beneficiary, the policy itself typically shouldn't be transferred. Consider an irrevocable life insurance trust for large policies.
• Vehicles. Some states make it difficult to title cars in a trust, and the probate process for vehicles is often simplified anyway.
• Assets with existing transfer-on-death designations. If an account already has a TOD or POD beneficiary, it will pass outside probate without needing to be in the trust.

For assets you exclude, make sure you've designated beneficiaries directly or included them in your pour-over will. This ensures nothing falls through the cracks and becomes subject to intestacy laws.

Living trust vs. will

When deciding whether you need a living trust or a will, it's important to understand the differences between them. Like a living trust, a will directs the disposition of your assets after your death, but it doesn't provide for the lifetime management of assets in the way a living trust does. The provisions of a will go into effect only after your death. Moreover, a will does go through probate, and this makes it a document of public record.