Dear Carrie: Everyone I know seems to be setting up a living trust, even my friends who aren’t that wealthy. My husband and I have wills, but that’s it. How do we know whether we need a trust? — A Reader
Dear Reader: It’s usually hard to get people to talk about estate planning, so I’m actually heartened by your question. No matter your age or your wealth, it’s smart to plan in advance how you’d want your property to be distributed should something happen to you.
Basic estate planning starts with a will, which deals with not only your property but also such important decisions as who will care for minor children if both parents are deceased. Another important piece of a basic estate plan is an advance health care directive, which is intended to let your doctors and loved ones know what medical steps you do — and don’t — want taken in a life-threatening medical situation.
If you have these two things in place, you’re generally covered. So why all the interest in a living trust? Let’s take a look.
Living Trust Basics
A living trust, specifically a revocable living trust, is a legal document that places your assets — investments, bank accounts, real estate, vehicles and valuable personal property — in trust for your benefit during your lifetime and spells out where you’d like these things to go upon your death. Because it is revocable, you can cancel or change it at any time during your lifetime.
You name yourself as the trustee (spouses can be co-trustees) and remain in complete control of your assets, moving them in and out of the trust as you wish. One difference from a will is that you also name a “successor trustee,” who will be your representative upon your death and transfer your assets directly to your beneficiaries according to your wishes.
Also, should you become incapacitated, your successor trustee would act on your behalf, handling financial issues and even managing property or business assets for you. It’s all clearly spelled out and, unlike a will, can be handled without any involvement by the courts.
Main Advantages: Avoiding Probate and Ensuring Privacy
This ability to bypass the courts is one of the big pluses of a living trust. A will has to go through probate, which is the thorough but lengthy and painstaking legal process used to value your estate, settle any debts, pay taxes and transfer assets to your heirs. Any assets that are registered only in the name of the deceased must go through probate. Probate costs and timelines vary by state, but generally, the bigger the estate the higher the costs (anywhere from 5 to 10 percent of the value of your assets) and the longer the time (anywhere from nine months to two years) until the assets are distributed.
Another big advantage of a living trust is privacy. A will is a public document, open for all to scrutinize and possibly contest. Probate itself is open to public view, so anyone can see the details of your estate. In contrast, a living trust is private, is generally more difficult to challenge and avoids the public probate process altogether.
For the record, there are other ways to avoid probate. For example, anything that has a named beneficiary, such as a retirement account or an insurance policy, goes directly to the beneficiary and wouldn’t be included in a trust. (Just make certain your beneficiary designations are up-to-date.) You can also set up payable-on-death accounts for bank accounts and certain government securities, and you can take title in property in joint tenancy or as survivorship community property.
A Possible Drawback: Cost
There are online tools that let you create your own living trust, but I strongly advise using an estate planning attorney. To me, it’s best to have someone who understands the ins and outs of the process, as well as the nuances of your own situation, to help you plan appropriately and avoid potential pitfalls.
Attorney’s fees will vary depending on the complexity of your financial situation. However, often an attorney will set up a basic trust for a flat fee. Plan on starting at $1,000 and going up from there. If your employer offers a legal plan as a benefit, you may want to look into whether a living trust is covered or available at a discounted rate. To minimize attorney time and cost, think in advance about the assets you want to place in trust, where you want your assets to go when you pass away and whom you want to name as your successor trustee.
An Important Caveat: You Have to Fund It
To get the benefits of a trust, you have to put your assets in it. This means retitling your property and accounts in the name of the trust. Your attorney may be able to take care of some of this for you, but if not, you must be sure to do this yourself.
You should also create a pour-over will. This essentially states that any assets not already in the trust should be included at the time of death.
A Smart Solution for Many
A living trust isn’t absolutely necessary for everyone, but it will certainly help if, for instance, you have a lot of assets, you own property in more than one state or you have an extended family with whom things could be more complicated.
Also, it’s not just a question of how much money or property you have. It’s what will give you the greatest assurance that your assets will be distributed according to your wishes and that the process will be as smooth and painless as possible for your heirs..
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at firstname.lastname@example.org.