Though the complexities of a living trust make these documents look significantly more complicated than they actually are, about a fifth of all Americans have living trusts—sometimes called revocable trusts or inter vivos. Living trusts don’t have to be complicated. Indeed, they’re an ideal way to protect your assets after you’re gone, while ensuring your heirs have quick access to their inheritance. Trusts are highly customizable, and you can create just about any system of disbursement in your trust creation documents. For instance, many parents leave their children a trust fund that the child can only access upon completing college or attaining the age of 30—or if the trustee deems that accessing the funds is in the child’s best interest.
What is a Living Trust?
A living trust places your assets in trust during your lifetime, to be transferred to your heirs upon your death. Unlike a will, which has to be probated upon your death, a living trust is distributed by the successor trustee you appoint to oversee the trust. You can put just about any property—including real estate and bank accounts—into a living trust, but there’s one critical distinction between a trust and a will: while a will simply outlines to whom each property will go upon your death, a trust must be funded. It’s not enough to simply draw up the trust. You’ll have to actually move the property into the trust, so be sure to contract with a skilled trust attorney. Doing it yourself is almost always a recipe for disaster.
Benefits of Living Trusts
A living trust can supplement a will or completely replace it. For instance, a father who wants to pass a college fund to his daughter might maintain a will, but set up a living trust to ensure she has ample cash to embark upon her college career. Or alternatively, he might opt to put all of his property into various living trusts, or a single trust to be overseen by his successor trustee upon his death. A trust offers a number of benefits, including:
- Privacy. While a will must be probated through the courts, a living trust is managed by a trustee, offering significantly more privacy. If you don’t want who owns which items to become a matter of public record, of if you’d prefer to keep your net worth a secret, a trust is a good way to accomplish this.
- Less time spent waiting. With a will, you’ll have to wait on probate courts, which can take several months—longer if the will is contested. Because a trust does not have to be probated, your heirs can receive their inheritance in a matter of weeks, and sometimes sooner.
- Reduced expenses upon your death. Not having to go through probate can save your family money. And because a trust is a confidential document that does not go through the courts, it will hold up better to a challenge, reducing conflict within your family, and potentially saving your loved ones thousands in legal fees.
- Customizable. Unlike a will, a private trust can be set up such that your trustee can take control as soon as you are incapacitated, making for a faster distribution of your assets. Conversely, if you draft a will and your executor is dead or unwilling to serve, the court will appoint someone for you, which could undermine the execution of your will—and possibly delay the process by several months.
Drawbacks of Living Trusts
A living trust is somewhat similar to a corporation in that it allows you to put your assets into an entity separate from yourself. For this reason, many people mistakenly believe that a living trust offers similar benefits to incorporation, such as a reduction in taxes or estate-related expenses. The major drawback of a living trust, though, is that it offers no special cost saving measures, so if you’re hoping to save on taxes, talk with a wills lawyer or financial expert; a trust in and of itself won’t save your money. Some issues you should discuss with your lawyer before creating a living trust include:
- Property taxes: Some states require a property tax reassessment if you name yourself as the trustee. Other states, such as California, have no such requirement.
- Real estate transfer taxes: In most states, transferring real estate to a living trust won’t give rise to transfer taxes, but some states do charge transfer taxes, so check with your lawyer to see if you might have to pay these taxes.
- Cost: Because a trust is more complicated than a will it often requires more work from your lawyer, costing you more in legal fees than you might pay with a will.
Should You Put Real Estate into a Living Trust?
It’s a common misconception that transferring real estate into a trust means you are no longer the owner of the trust. Instead, transferring real estate simply changes how the property will be managed upon your death or incapacitation. If you’re hoping to protect your privacy and avoid probate, putting your property into a living trust is often a wise strategy.
Some issues you should discuss with your lawyer prior to placing your property into a trust include:
- Homestead rights: In most cases, homestead rights still apply to properties placed in trust.
- Due-on-sale clauses: A lender can’t typically enforce a due-on-sale clause if you transfer your primary residence to your trust.
- Mortgage interest tax deductions: In almost all cases, you can still deduct mortgage interest payments from your taxes.
- Insurance: As long as you remain the trustee, yo will not need to change the registration or name on your insurance policies.
If one of your concerns is a rapid transfer of your property to your beneficiaries if you become incapacitated, a living trust is almost always better than a will. For trust owners concerned about privacy, there’s one key issue to consider. If your will includes a testamentary trust, documentation of the trust must be filed with the court as part of the probate process, slightly undermining your privacy. Though trusts are more private than wills, you should not assume that your trust will always remain confidential. A dispute over the trust that ends up in court, for instance, could render portions of the trust—or testimony related to it—a matter of public record.
Does Every State Use Living Trusts?
Every state recognizes living trusts, and a trust that is legally valid in one state should also be legally valid in another state. However, state laws for the creation of living trusts slightly vary, so it’s important to work with an attorney who specializes in real estate, trusts, and ideally, in both.
Note that once a trust is created, unlike a will, it will not automatically apply to property you subsequently acquire. For instance, with a will, you can leave all of your property to one person, whereas with a trust, you must fund the trust before anyone can access it. Moreover, if you acquire property subsequent to the creation of the trust, you must add that property to the trust for it to be covered.
This can get especially tricky if you move to a new state. Though all states recognize living trust laws, the rules for creating a trust vary somewhat. So moving to a new state may require the creation of a new trust if you buy property in that state and wish to include it as part of your trust.
Deeds for Transferring Ownership Into a Living Trust
Before you can transfer any property to your trust, you must create the trust. But the simple creation of the trust won’t do anything if you don’t move the property into the trust. This is where deeds to transfer ownership enter the picture. The simplest way to transfer real estate into a trust is to use a quitclaim deed. You’ll then file a real estate deed transfer form in the office of your county clerk to complete the transfer.
The procedure for transferring other types of property varies. Most states allow vehicles to be held in living trusts. In these stats, you’ll complete a title transfer form. When transferring personal property such as jewelry or cash, name these items in your trust creation documents, then maintain them in an easy-to-access location, such as a safety deposit box, which your trustee knows about.
If you’re transferring an account with a financial institution to your trust, you’ll typically have to do so through the financial institution, typically by completing a form. Make sure you also name the account, including account number and estimated value, in your trust creation documents.
Do Trusts Need to Be Registered?
In some states, you’re required to register your trust with your local court. The law is constantly changing, so consult an attorney before making any decisions about your trust, especially if you’re moving to a new state for the first time. At the time of writing, only Colorado, Florida, Alaska, Idaho, Hawaii, Michigan, Maine, North Dakota, Missouri, and Ohio require trustees to register with the court. If you create a trust in one state and move to a new state, it’s a wise idea to register the trust with the new state of residence, but you’re not always legally required to do so. Few penalties exist for failing to register a trust, but trustees can be removed from their position for a failure to register.
Selecting a Trustee
It’s tempting to pick someone you love, offering the role of trustee as a show of trust and goodwill. But in most cases, it’s a bad idea to make a close family member a trustee. Instead, a trustee needs to be financially savvy and trustworthy, with no history of financial problems or financial mismanagement. A beloved child who struggles with finances might find the temptation to clean out the trust too much to resist.
Many trustees opt to select professional trustees as their successor trustees, but a financially savvy family member who has plenty of money of their own and a history of making choices that benefit other people is also an excellent choice. You may also want to consider nominating a successor trustee, as well as a back-up, so that there’s someone to oversee your trust even in the worst-case scenario of your death and the death of the successor trustee.
Before you initiate a trust, talk to a lawyer.