For most people, a will is the first choice for passing on an estate to heirs. But it's not the only choice. Among other estate planning tools, the revocable living trust is gaining in popularity, especially among boomers.
In addition to being one of several ways to avoid probate—the legal process to determine whether a will is valid—living trusts may offer before-death and after-death advantages.
Whether a living revocable trust is right for you depends on your circumstances. Consultation with a qualified attorney and a personal financial adviser should always be part of your estate planning, but here are 10 things you should know about living trusts:
What is a revocable living trust?
A revocable living trust is a written agreement designating someone to be responsible for managing your property, It's called a living trust because it's established while you're alive. It's "revocable" because, as long as you're mentally competent, you can change or dissolve the trust at any time at your own discretion for any reason. Typically, a living trust becomes irrevocable (cannot be changed) when you die.
A trust involves three parties: you as the creator, the trustee or trustees who agree to manage your assets as directed by the terms of the trust, and the beneficiaries.
You will probably want to name yourself and your spouse as trustees, because you want full control of the property while you're alive. As trustee, you will have the power to wheel and deal with your assets—sell them, exchange them, invest them, do whatever you want with them.
What is the difference between a living trust and a will?
Both a will and a living trust contain your inheritance instructions, meaning who gets what, when they get it, and how.
"A trust is often preferred for people concerned with privacy and avoiding probate," says attorney Thomas J. Bogar of Cheltenham, Pa. A living trust will not become part of the public record unless a trustee or a beneficiary demands court approval of accounts. Probate records are always open to the public.
While trusts serve a purpose in some circumstances, for most people with relatively modest estates, wills are quite adequate. They are generally less complicated and less expensive than a trust.
What if I don't have either one?
If you don't leave valid instructions about your estate, your property generally goes to your spouse or your closest heirs, which may not be what you want to do. Also, the state could assign someone you wouldn't trust to manage the distribution of your property or be the legal guardian of your minor children.
What can a revocable living trust do for you, and what can't it do?
A living trust can provide you with the peace of mind that comes from knowing that your assets and your heirs will be protected in the event that you unexpectedly become unable to handle your own financial affairs. It eliminates the need for your estate to pass through probate court before it can be passed on to your heirs. Properly worded, a trust can also be used as a substitute for powers of attorney
Your trust can be written in a way that will pass your assets on to your beneficiaries immediately upon your death, or you can designate that they be portioned out over time and in amounts that you specify. Your attorney can help by including tax savings clauses that may help to reduce state and federal estate taxes.
Among the things that a trust cannot do is protect against a disgruntled heir. "A living trust can resolve some of the most common family conflicts that may arise in the inheritance arena," says Santa Monica, Calif., attorney Jeff Condon. "However, if you cut someone out of your living trust as a beneficiary, he or she can challenge the trust just as a will can be challenged."
Who are the trustees?
Any mentally competent adult may be named trustee. "Normally, you will name yourself and your spouse as trustees," says Condon. "That's because you want full control of the property while you're alive." If you become too ill or disabled to manage your property, your co-trustee or successor trustee will do this for you.
Normally, you would name your children as successor trustees, says Condon. "However, if you're not confident that your children would distribute the assets according to your instructions, you should name a professional fiduciary as your successor trustee. This could be the trust department of a bank, a professional trust company or a private fiduciary."
Do I have to put a lot of money in a living trust at the start?
"Except for a token dollar amount, it isn't necessary to fund a living trust when it is created," says Bogar. "You can fund your trust with as little as a dollar or as much as every asset you own. You can even specify in your will that your trust is to be funded only upon your death. There are advantages to each choice, depending on your needs and concerns."
Will a living trust require a lot of additional work and cost if I add or delete property or investments?
"No," says Condon. "You do not have to see your lawyer when your assets change."
Do I need an attorney to prepare a living trust?
"Yes," says Bogar. "I can tell you horror stories of poorly drafted trusts. You don't want to be your own doctor. It follows that you don't want to be your own lawyer."
Be cautious about using generic or online living trust kits that claim to be customized documents prepared by an attorney.
How much does it cost to set up a living trust?
The price could be all over the map depending on the attorney used, the complexity and size of the assets and the geographic area. The fee could be as little as a few hundred dollars, but more typically runs several thousand or more.
So is a revocable living trust right for me?
It's not right for everyone, experts agree. You should weigh the advantages and disadvantages. For simple estates with few assets and investments, it may not be worthwhile, since setting up a trust usually involves more expense than a will. Consultation with a qualified financial adviser should help you decide.