Worried that creating a living trust will turn your children into spoiled “trust fund kids”? Or that you need millions of dollars to create one? Don’t let these myths stop you from setting up a revocable living trust. Here’s why.
A living trust has many benefits that apply even if—like most of us—you do not have a multi-million dollar estate to pass on to your heirs. You can also structure your children’s trusts to achieve just about any goal you have in mind, while protecting them from creditors, lawsuits and even divorce (I know, it’s hard to imagine your 5-year-old divorcing at this moment, but life happens!).
I outline some key advantages of a living trust below. But first, what the heck is a living trust?
A living trust is simply a way of holding your assets while you are alive. You transfer your assets into your trust by either re-titling them (such as your bank accounts) or naming the trust as beneficiary (such as your retirement plans). This is called “funding” the trust. But the assets are still yours. You merely hold them as trustee of your trust rather than as an individual.
As far as the IRS is concerned, they are your assets. As far as creditors are concerned, they are your assets. The trust is not a separate entity. It does not require a separate tax return, or a separate tax ID number. You retain absolute control over your assets. You can sell them, remove them from the trust, or even revoke the trust entirely.
Similar to a will, a living trust directs how you want your assets distributed at your death. But that’s where the similarities end. Here’s what else a trust accomplishes, which can be boiled down to two key areas—probate and disability:
- Skip Probate. Probate is the court process that your estate must go through before your assets are distributed, if you die with a will or without any estate plan. There is a lot of debate over whether probate is something that really needs to be avoided, or if people’s fear of probate is unfounded. Either way, though, it is something that most people would prefer not to put their family through. Probate requires court involvement. It is public record. It requires attorneys, appraisers and other professionals (who generally do not work for free). It can be time-consuming. And it is disruptive—especially if you have minor children or own a business. And if you own property in more than one state, you will be going through a separate probate process in each state. Without going into more detail than you need, a properly funded living trust keeps your assets out of probate.
- Plan for Disability. Although most people seek out a living trust for probate avoidance reasons, the greatest advantage of a living trust really stems from the fact that it goes into effect while you are alive. This means that if you find yourself unable to manage your own affairs due to illness or an accident, you get to dictate—through your living trust—who handles your affairs and how they will be managed, without needing a court-appointed guardian or conservator. As with probate, these proceedings are costly and public.
Are there any disadvantages to a revocable living trust? Not really.
Warning: a lot of companies have made a lot of money providing online consumers with “mill” revocable living trusts. These trusts are to be avoided, and have also led to a lot of bad press about living trusts in general. If you decide to create a living trust, you want one that is thoughtfully prepared by an experienced attorney and properly funded.