A living trust is an estate planning tool that serves a variety of purposes. It can help you and your family prepare for an uncertain future. It can help your estate and your heirs avoid the hassle and costs of probate. And it can preserve your privacy.
As with all trusts, a living trust is a legal document by which the creator retitles certain personal assets in the name of the trust and authorizes a trustee to manage those assets as instructed for the benefit of the creator and any beneficiaries.
In a simple living trust, the creator — also known as the grantor — is often the trustee but also names a successor or co-trustee. The assets eventually will pass to the trust’s beneficiaries.
Living trusts are also known as revocable trusts. As that more formal title indicates, the grantor can change the trust as long as he or she is physically and mentally able.
Do you need a living trust? As with everything financial, it depends on your situation. However, there are some general instances in which a living trust could be a good idea.
When incapacity seems likely
If a person has dementia or another debilitating condition, a trust offers a way to get that person’s affairs in order before the person becomes incapable of managing them, says Pamela Hailey-Petty, an estate planning attorney in Austin, Texas.
Since there’s no way to know exactly when the ailing person might become incapacitated, the trust option allows for smooth transition planning. “You retitle assets you own personally into the name of the trust, and you serve as trustee or co-trustee during your lifetime,” Hailey-Petty says.
The trust must be created when the ailing person is deemed mentally capable of agreeing to the document. Otherwise, it won’t be legally binding.
The successor trustee takes over sole management responsibility after the grantor dies or is determined to be incapable of handling financial affairs.
When you want to avoid probate
Probate is the legal process during which a court validates your will and then authorizes your executor to distribute your estate to your beneficiaries as you instructed. If you die without a will — or “intestate” in legal terms — the probate court decides how to distribute your property and to whom.
Probate, however, applies only to assets that are part of your personal estate when you die. If you establish a living trust and legally place property into the trust, that property is no longer subject to probate oversight.
A living trust can also help if you own real property in multiple states, Hailey-Petty says. She cites as an example a Texas resident who owns a home in the Lone Star State as well as real estate in Colorado and Florida.
“If that property is held in the personal estate upon passing, you have to probate it in Texas and the ancillary probate courts in the other two states,” she says. “That can be cumbersome, expensive and, depending on state requirements, difficult.”
To avoid that kind of scenario, you can deed the property into your living trust.
When you want privacy
For people who value it, privacy is a definite advantage of a living trust.
In addition to being time-consuming and often expensive, probate proceedings are public. However, since assets placed in a living trust don’t have to go through probate, they are kept away from prying eyes. A living trust generally is a private document that only the trustees and certain beneficiaries will be able to read after your incapacity or death.
“Disinheriting someone or making distributions that for whatever reasons you don’t want to be public are often reasons for creating a trust,” Hailey-Petty says.
But don’t forget your will
Remember, though, that in most states your will still exists as part of the public record. And yes, you still need a will.
Why? Trusts tend to deal with specific assets rather than the sum of your personal holdings. Even if you do try to put most everything into your trust, chances are you’ll overlook something or acquire assets shortly before you die that won’t make it into the trust.
Wills also are important in determining guardianship for your minor children.
If you’re relying on a trust for most of your personal property, estate experts recommend you have at least a bare-bones will to state who should inherit any property not in your trust.
Another option is a so-called pour-over will. This document states that if an asset not in your trust is discovered after you die, it will go into your trust. That asset still will have to go through probate, but at least it should ultimately end up as part of your trust estate plan, to be distributed as the arrangement details.
And look elsewhere for tax relief
If you’re looking to a living trust to help reduce your estate’s tax burden, you need to look elsewhere.
“Because it’s revocable and you still have full control, the trust’s assets are still in your estate for estate tax purposes,” Hailey-Petty says.
If keeping part of your estate out of Uncle Sam’s tax clutches is a major motivation, she suggests you talk with a tax attorney about establishing an irrevocable or bypass trust that could accomplish some tax savings.
For most people, though, the federal estate tax is not a concern. Few Americans leave estates large enough to trigger the levy. For the 2017 tax year, if you die and leave assets of more than $5.49 million, the amount over that exclusion figure could be subject to a federal tax rate of 40%.
Estates valued at less than that aren’t subject to the federal estate tax but could face taxation in a handful of states that have lower thresholds for estate and inheritance taxes.
“Once we go over their assets, with the [tax] exemption as high as it is right now, it’s not a problem,” Hailey-Petty says of her consultations with some of her clients. “If that’s your only purpose, then [you] don’t need a living trust.”
Kay Bell is a contributing writer at NerdWallet, a personal finance website.