Estate Planning: Living Trusts

Living trusts are created with a clearly defined objective: to avoid probate. Misconceptions about living trusts have spread to the point where people think trusts can accomplish much more than they are designed to. But if you are worried about your will being contested or your heirs fighting over your assets, a revocable living trust may be your best option.

You fund a revocable living trust with all, or largely all, of your assets during your lifetime. The trust owns the assets, but you can still use and control them while you’re alive. Once you die, the revocable living trust becomes irrevocable, and the assets in the trust are distributed according to your wishes by designated successor trustees who are exempt from probate.

In addition to giving you more control and privacy over your assets, a living trust may save your heirs time and money. An AARP survey found that it takes roughly 18 months to distribute the typical estate due to probate. Settlement costs from probate may eat up as much as 5% of an estate.

Living trusts do not reduce taxes.

Assets within a living trust are fully taxable at the federal and (generally) state levels. Unless someone has drafted the trust to include tax-saving provisions, it will offer no specific estate or income tax advantages to the grantor or beneficiaries.

So if your objective is to help your heirs avoid estate taxes, then planning techniques like Roth conversions, gifting, family limited partnerships, and life insurance will be smart to learn more about. These are strategies that can potentially knockdown the tax burden facing your beneficiaries.

Living trusts do not relieve trustees of their duties.

When a grantor of a living trust passes away, the language in the trust document will not magically “do all the work” for the successor trustee. While a successor trustee will usually not have to deal with probate, other responsibilities will remain. Titles will need to be changed, and appraisals may be necessary.

A living trust costs money.

A lawyer may charge you $1,500 or more to create one. If you have significant assets and fear a dispute over your will, it may be worth it to establish a trust.

The Internet, books, or software offer available living trust solutions. However, when cutting and pasting boilerplate language and filling in some names here and there, what kinds of legal and financial risks are you taking?

While engaging the help of an attorney when drawing up a living trust is certainly advisable, be advised that paying a lawyer fee is no guarantee of competence; amending simple errors could cost you another $300–500.

A living trust is not a will.

You still need a will, even if you have a living trust. In fact, you are probably going to need a “pour-over” will down the road, assuming you will keep accumulating assets after the trust is drawn up. A pour-over will place these stray assets into the trust.

Additionally, you will want a will if you wish to make charitable bequests or gifts to friends or relatives upon your passing, as a living trust may not carry out these gifts on your behalf. A will is also the way to name a guardian for any minors.

A living trust is not a living will, either.

A living trust does not function as a health care directive or a power of attorney. These are separate estate planning documents. While some families ask attorneys to create these documents concurrently with a living trust, a living trust won’t stand in for them.

While living trusts are highly touted and can be highly useful, this does not mean that every family should establish one.

Best to establish your living trust through an attorney. 

Based on the many snafus we have seen folks run into, it's our strong feeling you should not attempt to create a retirement plan trust without an attorney’s help. As an example of what can go wrong for do-it-yourselfers, the 60-day rule that applies to indirect rollovers of qualified retirement plan assets does not apply to inherited IRAs. If you make an indirect rollover of inherited IRA assets that you received from a non-spouse, and then take possession of that money while its on the way to another inherited IRA you have with a different firm, you will be considered to have received taxable income, even if you complete the rollover process within the 60-day window. As such, to avoid being blindsided, seek out the help of those with the right knowledge and experience.