Regardless of its size, the goal of an estate plan is to facilitate the transfer of property and assets to your family with the least amount of cost and friction. As you work through the planning process, you have several tools at your disposal, including a will, power of attorney, medical directive, and trusts—all playing a critical role in ensuring your wishes are carried out with the least number of complications for your executors and heirs.
Chances are, if you have looked into an estate plan, you have heard a lot about living trusts as a way to avoid the delays and cost of probate. Assets assigned to a living trust during your lifetime are passed directly to the trust’s beneficiaries upon your death outside of probate court and to the exclusion of any creditors. Acting as trustee until your death, you control the trust and its contents with the right to revoke or cancel at any time.
Living Trusts are not for Everyone
On the surface, the advantages of a living trust are very appealing, and they’re not terribly expensive to set up—though they do require updating at times. Still, in many situations, the benefits of a living trust are so minimal they may not be worth the time and expense. In fact, in some cases, they can cause more complications. In truth, living trusts may not make sense for most people.
For example, if you and your spouse jointly own your assets and plan on leaving them to each other, there is no need for a living trust because those assets don’t go through probate. Or, if your assets are held in accounts, such as a bank or brokerage account, or retirement account, they can pass by beneficiary designation just as with a life insurance policy. You just need to make sure you have assigned beneficiaries to the accounts. In these situations, a will would suffice.
In most states, smaller estates with less than $50,000 of assets and no real estate can bypass probate with a simplified, out-of-court process. Generally, the average estate doesn’t include enough assets to require formal probate, so it doesn’t make sense to add the complexity of a living trust to the plan.
When a Living Trust Makes Sense
Under some circumstances, a properly drawn living trust can make good financial sense, such as when:
- You Want to Treat Beneficiaries Differently
It’s not uncommon for parents to want to divide up the estate in ways that treat one child differently from another—either in the type of assets they are to receive or the value of the assets. A living trust can spell out how all beneficiaries are to be treated, and they are more difficult to contest than the directives of a will.
- You Want to Distribute Assets According to a Timetable
If you have younger children who may not be ready to receive assets, you can establish a timetable for the executor to follow in distributing the assets.
- You Own Out-of-State Properties
If you own a vacation home or investment property in a state different from the state in which you reside, it may be required to go through probate in that state. A living trust can facilitate the transfer of property outside of probate.
- You Own a Business
If you own a business, the last thing you want is to have it tied up by a probate court before your business continuation plan can take effect. That is a circumstance where a living trust is needed.
- You Have a lot of Assets
Generally, the greater the value of your estate, the more time and money you can save for your heirs by avoiding probate. Estates valued at $10 million or more would benefit from a living trust.
It’s essential to note that these are only general guidelines for determining if you should consider a living trust. While nearly everyone can benefit from a will and a power of attorney, it would be important to consult with your financial advisors as well as an experienced estate or probate attorney to see if a living trust could improve your estate plan.