Should you have a living trust instead of a will? It’s a choice that many Baby Boomers are making today and other households are considering. A living trust allows for inheritance instructions to be followed, but with one clear advantage. A living trust does not go to probate, so the records of the transfer are not made public. This can be very beneficial to those who have a large amount of wealth that is being transferred to them. Could a living trust be right for you?
The Pros of a Living Trust
Because the assets of a living trust can be directly managed by the grantor, or the individual who has established the trust, there are no special tax considerations that apply to these assets. Because of this, all properties are considered to be the same. This is especially beneficial for individuals or households who own properties in multiple states. Because the living trust is one entity, these multi-state assets do not need to go through a separate probate process in each municipality. For states like Maryland or California that have complicated probate laws, this is a definite advantage. Here are the other positive key points to consider in the establishment of a living trust.
1. It can save you a lot of money.
A living trust will typically cost more in the planning stages when compared to a will. This is due to the complexity of the legal documentation that must be created. An additional amount of paperwork is required through separate transfers of assets that are going into the trust. Once named to the trust, however, the transfer is completed after death and the funds can be distributed as desired.
2. They stand up to contests extremely well.
If there aren’t any inheritance documents on the books, then most assets are going to be given to a living spouse, children, or whomever is the closest living relative. A will can help to dictate instructions, but a will is also easy to challenge if there is any reasonable doubt regarding its authenticity. In a living trust, the instructions are set and parties named beforehand, which limits the ability to contest.
3. Heirs can take control if someone becomes ill or incapacitated.
The beneficiaries of a trust can gain control over it should there be an illness or some other issue that causes incapacitation, but not death, so that the trust can continue to grow. If there was just a will in place, then the beneficiaries would be required to have a power of attorney that covered financial matters in order to do so. People get to choose which heirs get to make specific decisions on their behalf ahead of time without court intervention.
4. Incapacitates can be challenged.
If someone believes that they have been declared unfit to manage their living trust, then this declaration can be challenged. The process is relatively simple and requires that someone show that they aren’t too ill or unfit to properly manage the trust. This allows individuals a process which can keep them in the loop well after a will or other inheritance process would have let someone else be in control.
5. Living trusts are extremely flexible.
A will has to be altered or changed every time it needs to be amended. This means new documents must be drafted and more filing costs initiated with every change. For a living trust, the grantor is able to add to the trust when they wish, amend it however they wish, or immediately revoke it if they so desire.
6. Living trusts can be professionally managed by a trustee.
Once the living trust has been created, the management of that wealth and its assets can either be done personally, by a professional trustee that is hand-picked, or through a combination of both. Many choose to be a co-trustee because this frees them from the daily management tasks of a living trust while still being able to direct the investment goals that are created and stay in control of all wealth growth strategies.
7. Anyone can be named as a party to the estate.
A living trust makes it a lot easier to name additional parties to the assets that are being managed. This is particularly useful for those who would like to have some or all of their assets distributed to educational institutions, corporations, or even the federal government if they so desire. Virtually anyone can be named as a party to the estate and become a beneficiary without the hassle of the legal documentation a will requires for every additional named party and for organizations that are tax-exempt, it eliminates any federal estate taxes that might have otherwise been issued.
The Cons of a Living Trust
Most individuals and households look toward a living trust because they want to avoid the probate process. In most instances, however, the probate process may last for just a few weeks. This means the higher upfront costs of the living trust and its time investment may not be necessary at all. Although the living trust does provide more privacy to those involved, these negative key points must also be considered to make sure establishing a trust is the right decision.
1. A living trust isn’t for every household.
High value households or those who have multiple children or heirs are the ones that benefit the most from a living trust. For those who are single, newly married, or have no significant assets, then a living trust really holds no benefit. If there are assets to distribute in this category that are important, such as investments or retirement accounts, a will can typically handle these issues.
2. They don’t cover future assets.
A living trust is an excellent vessel for current assets. What happens to additional assets that are accumulated by an individual after the living trust is formed? These additional assets are typically covered by a pour-over will, which means some heirs will still need to go through the probate process even though the living trust was established in the first place.
3. The trust is the legal owner of all properties contained within.
This might be the biggest disadvantage of them all. When assets are transferred over to a living trust, it essentially becomes a new organization. The goal of this organization is to properly manage the assets contained within it. This means for property ownership purposes, the owner of the assets is the trust and not the heirs that are named or the individual who formed it in the first place.
4. They do not save any taxes.
Many people believe that the formation of a living trust will save them on their tax responsibilities because of its status as an organization, but this is untrue. Heirs or grantors are still responsible to pay taxes on all income that is obtained from the property contained within the trust. Estate taxes are also required. From a tax perspective alone, there is no difference at all between a living trust or any other inheritance vessel.
5. Creditors can hang around for a long time.
Sometimes probate is a better option just because it helps by putting in a stay against creditors on a person’s estate. Just because someone dies doesn’t mean all of their obligations pass away as well. Probate places a 6-12 month stay on the estate creditors so that assets can be protected through a process that is less private, but not necessarily expensive or time consuming.
6. Not every asset can be included in a living trust.
Many of the investment accounts that Americans hold today aren’t even eligible to be included with a living trust. This includes all IRAs, and assets that are jointly owned, and other tax-advantaged retirement plans. Some issues can be avoided by couples if they initiate a joint living trust, but there will always be limitation in place as to the kinds of assets that are included. If there are specific instructions to follow, then a will is always going to be required even if the whole purpose of the living trust was to avoid having one in the first place.
7. It is easy to fall into fiduciary lapses.
Because almost all living trusts are privately managed in some way, there is very little court supervision over these assets. This means fiduciary lapses may occur, even when there is a professional trustee managing the trust. Although most of these lapses are inadvertent, a small miscalculation on benefit distribution can wind up leaving heirs with a lengthy litigation process should the benefit plans not be followed as intended.
The pros and cons of a living trust show that it can be highly beneficial to have in place in specific circumstances. By evaluating these key points and applying them to your unique situation, it will become easier to decide whether or not a living trust is the right way to manage your assets now and into the future.