We see questions about living trusts all the time. And they’re important ones to think over. Afterall, they dictate where everything you’ve worked for ends up. However, it’s not always obvious they’re the best fit. Consider the following client email below:
“Hey [Crafted Finance], We’ve had some friends recently that have recommended that [Client Spouse] and I look into a living trust. I’ve done some basic research but I’m not fully convinced that this is something that we need given that we don’t have any dependents. What’s your thoughts on establishing a living trust for [Client Spouse] and I? Any benefits?”
As a result, we wanted to take a deeper dive into the subject. Together we’ll review what a living trust is, their advantages, and whether or not one may be right for you.
What Is A Living Trust?
A living trust is simply a legal document that enables the transfer of one’s assets, and can be used to bypass the often complicated and costly process of probate (more on this later).
The creator of the trust, or grantor, designates a trustee who is responsible for managing the grantor’s assets until they reach the beneficiary. For example, a parent (grantor) designates their brother-in-law (trustee) to manage their assets until their child (beneficiary) is legally an adult.
It’s also worth noting that a beneficiary can be an individual (ex: child) or an organization (ex: charity). Additionally, living trusts can be revocable or irrevocable. In a revocable trust, the grantor has the option of altering its specifics. But in the case of irrevocable trusts, they’re set in stone.
The main difference between a living trust and a will is that a living trust goes into effect as soon as it’s created, and the distribution of the grantor’s assets can happen while they’re still living. Additionally, all wills must go through the process of probate, and aren’t able to bypass them like living trusts.1
Why Would You Want To Avoid The Probate Process?
There are numerous reasons to take advantage of a living trust. But we’ll start with the main one mentioned above, to avoid the probate process.
What is the probate process?
Probate is the formal legal process that administers the distribution of one’s assets upon death. It is overseen by a probate court, which has legal authority to preside over matters involving wills and estates.2
The process may entail, but isn’t limited to validating a will, taking inventory and appraising assets, paying necessary debts and taxes, establishing an executor, and distributing the assets as laid out in a will (or lack thereof).3
Probates can be extensive and expensive ordeals. Depending on the process, there can be considerable time spent preparing your assets and their distribution. Costs of seeing the process through may include, but are not limited to attorney fees, filing fees, appraisal fees, notary fees, and storage fees.4 5
However, by having a living trust, you’re able to bypass the probate process entirely. That’s because the assets inside a living trust are not considered part of your estate, and thus need no court to preside over their distribution. Instead, you’re able to transfer the assets held by the trust faster, cheaper, and more directly to your beneficiaries.4
Please Note: The potential costs and length of a probate process can vary greatly by state. Additionally, if you do not have a will with a named executor, the probate court will appoint one itself. Lastly, it can make sense to have both a living trust and a will. A living trust can expedite the transference of major assets, and the will can deal with residual, less-important ones.
Are There Other Benefits To A Living Trust?
Outside of avoiding the probate process, there are a few other reasons why you may want to consider forming a living trust. They include, but are not limited to:
- Flexibility – In the case of revocable trusts, grantor’s can continuously alter how they want their assets to be distributed overtime. By naming yourself as the trustee, you keep control over all the assets in your trust. You’ll be able to add or subtract assets, refinance them, or dissolve the trust altogether if and when you see fit.4
- Tax benefits – In the case of irrevocable trusts, grantors can realize certain tax benefits on their assets. For example, by moving property into an irrevocable trust it technically no longer belongs to you, but to the trust. Since you’re no longer the owner of the property, it won’t be included in tax calculations on the property’s value when you die.6
- Privacy – Since the probate process is a legal proceeding inside a court, it becomes a matter of public record. This means your estate’s assets and distributions will also be public record, and so will the terms of your will should you have one. Living trusts, however, are private and will remain so even after you die.4
Conclusion
Whether or not you want to set up a living trust will depend on you, and your unique situation. And it’s something that can be beneficial to even those without kids. Remember your beneficiary can be people or a cause you believe in. Moreover, it’s best to have a plan in place to take care of your partner should something happen to you.
You’ve worked hard to get to where you are, and it’s important to lay out how you want your assets to be distributed. While a will has its place, the add on of a living trust can have an incredible impact. It has the ability to bypass the probate process that wills can’t, and it will save your beneficiaries the headache of frozen assets, legal proceedings, and numerous expenses.
When it comes to deciding whether or not a living trust is for you, you’ll want to do your own research and contact qualified professionals. We recommend getting in touch with an estate planning attorney as they have the most experience in navigating these systems and tailoring solutions to your needs.
We also recommend touching base with a financial advisor. At Crafted Finance we help our clients get a reign on their finances, and we walk them through the financial planning side of life transitions like these. If you have any further questions feel free to reach out to us at (650) 336-0598 or fill out a contact card here, and we’ll reach out to you.
