Thinking about what happens to your finances after you're gone isn't the most fun way to spend an afternoon, but it's one of the most loving things you can do for your family. You've worked hard to build your wealth, and you want to help ensure it supports the people you care about without burdening them with legal headaches or public court battles during a time of grief. We're here to help you navigate these decisions with calm confidence so you can get back to living your life.
Understanding the concept of a living trust
Think of a living trust as a secure container for your assets. It's a legal arrangement that allows you to transfer ownership of your property to a trustee. This person manages those assets for the benefit of your named beneficiaries. It's a powerful tool because it gives you flexibility, privacy, and control over how your assets are distributed. Perhaps most importantly, it helps your loved ones avoid the lengthy and costly probate process and can help minimize estate taxes.
The two main types of trusts
When we talk about living trusts, we're usually looking at two main categories: revocable and irrevocable.
Revocable trusts
A revocable trust (or revocable living trust) is a legal document you can change at any time. As the creator (or grantor), you have the power to modify or revoke it completely during your lifetime. This flexibility allows you to make alterations at your own volition as your life or finances change.
Irrevocable trusts
An irrevocable trust is different. Once you transfer assets into this type of trust, you generally can't take them back. It cannot be altered without the agreement of the beneficiaries or by court order. The grantor must relinquish all ownership rights to the assets inside. While young people often favor revocable trusts for their flexibility, it's important to note that a revocable trust effectively becomes an irrevocable living trust the moment the grantor dies.
The role of the trustee
A trustee is the person or institution you choose to manage the assets in the trust. Their job is to handle financial affairs, adhere to your stipulations, and help ensure the correct distribution to your beneficiaries. A trustee needs to be dependable and possess sound discernment, organizational capabilities, and a bit of tax and accounting knowledge.
Fiduciary duty
Your trustee has a legal liability to exercise their fiduciary duty. This means they must act with due care and diligence. They are responsible for safeguarding and distributing assets according to your provisions, acting in the best interests of the beneficiaries, and keeping accurate records of all transactions. They must also avoid conflicts of interest.
While a trustee can also be a beneficiary, it's best to consult an estate planning attorney before appointing one to avoid any potential conflicts.
How to establish a living trust
Building this roadmap involves three specific steps. It helps ensure all assets are suitably included for a seamless transfer of ownership.
1. Inventorying assets
First, you need a comprehensive list of everything you own that belongs in the trust. This inventory should include property, accounts, safety deposit boxes, storage units, and any other assets. You'll want to review the trust instrument, compile a list of initial assets, and update it periodically. Be careful to avoid common errors like inaccurately identifying assets or omitting them completely.
2. Appointing trustees and successor trustees
You need to choose someone to manage the trust if you become incapacitated or pass away. When selecting a successor trustee, look for trustworthiness, integrity, financial acumen, and the capacity to follow instructions. You can also appoint an institution, like a bank or trust company, though keep in mind this may involve additional investment advisory and trustee fees.
3. Transferring assets into the trust
This is the most critical step. A trust is useless if it's empty. You must change the ownership of your assets to the trust's name. Assets suitable for transfer include bank accounts, real estate, personal property, and investments like stocks, bonds, ETFs, and mutual funds.
For real estate, you'll specifically need to:
- Prepare a new deed indicating the trust's name as the new owner.
- Sign and notarize the new deed.
- File the new deed with the appropriate office.
We highly recommend seeking advice from a legal professional during this phase to help ensure accuracy.
Why you might want a living trust
There are several distinct advantages that make this an attractive option for securing your financial future.
Avoiding probate
Probate is the legal process where a court verifies your will and authorizes an executor to distribute your estate. It involves the court, making your private debts and asset distribution a matter of public record. Living trusts allow you to bypass this. By avoiding probate, you save time and money, minimize potential disputes among heirs, and help ensure efficient asset distribution.
Privacy protection
Because trust assets bypass probate, your legal documents stay out of the public domain. This shields your estate's information from prying eyes, creditors, and legal disputes.
Flexibility and control
Revocable living trusts let you modify or terminate the trust as needed. This helps ensure that your wishes are adhered to even if your family dynamics change over time.
Disadvantages and costs to consider
It's important to weigh the drawbacks before diving in.
Initial costs and time commitment
Establishing a living trust is more expensive than a simple will. The average cost of setting up a living trust in the US is generally between $1,500 and $3,000. This doesn't include the cost to maintain it throughout your lifetime. The process can take anywhere from a few weeks to several months depending on conditions.
Tax implications
Living trusts do not offer direct tax benefits. Assets inside a revocable trust are still considered part of your estate for tax purposes. While they avoid probate laws at the state level, they will not exempt assets from federal or state estate taxes. Generally, income generated from trust assets is imposed upon the grantor. Beneficiaries pay taxes on income distributions but usually not on returned principal.
Living trust vs. will: which is right for you?
Both tools address your estate planning needs, but they function differently.
Asset distribution
Wills are straightforward and less expensive to create. However, living trusts offer more control, avoid probate, and allow for quicker distribution. A will still allows you to specify how assets should be distributed, but it must go through the court process.
Estate planning for minor children
If you have young children, trusts provide incredible control. You can nominate a trustee to manage assets for the children until they reach a predefined age. Wills allow you to designate a guardian for minors and specify asset distribution, but trusts offer more nuance in how those assets are accessed over time.
Note that a revocable living trust cannot designate guardianship for minor children; you typically still need a will for that specific purpose.
Related: What's the difference between Special Needs Trusts and ABLE accounts?
Tips for choosing a living trust attorney
Choosing the right partner is key. When looking for an attorney, consider:
- Expertise: Look for a specialist in estate planning.
- Cost: Inquire about fees and additional costs upfront.
- Communication approach: Find someone who is responsive and answers your questions clearly.
- Background: Scrutinize reviews and request recommendations from friends and family.
Keeping your trust updated
Your life doesn't stand still, and neither should your trust. Most financial planners and attorneys recommend revising your living trust every 3 to 5 years. You should also update it after major life events like marriage, divorce, moving, changes in financial status, or the passing of a trustee or beneficiary. Staying on top of these changes helps ensure your roadmap remains effective.
Related: The ultimate guide to prenuptial agreements: Benefits, myths, and tips
The Facet difference
At Facet, we believe that estate planning isn't just about legal documents; it's about making sure your values live on. We don't just look at your investments in a vacuum. Our CFP® professionals work with you to build a comprehensive financial roadmap that integrates your estate wishes with your tax strategy, retirement goals, and daily life. Because we operate on a flat membership fee, we don't charge a percentage of your assets. This means we can give you objective advice on whether a trust is right for you, helping you find the best way to protect your legacy while minimizing conflicts of interest. Note that while Facet provides estate planning guidance, actual document preparation and legal services are provided by wealth.com, a separate third party, and may incur separate fees.
