Living Trust

Living trusts, an alternative to a durable power of attorney, can provide a variety of estate-planning advantages, such as avoiding probate and keeping your financial matters private. Living trusts - not to be confused with living wills - allow you to specify whom you want to take over your financial affairs if you become incapacitated. The virtues of a living trust often are over hyped by lawyers, financial advisors, and insurance agents. Yet there are situations where a living trust is desirable, if not essential.

Definition. A living trust – officially it's called a revocable living trust and is also known as a family trust - is a trust that's established while your living and is revocable, so you are able to make changes whenever you want during your lifetime, including revoking the entire trust. The document describes how your property should be managed while you are alive and how it should be distributed upon your death. Provisions for how your property is to be handled if you become incapacitated are also provided in the typical living trust.

Some people set up irrevocable living trusts whose provisions can't be changed during lifetime. These are complex arrangements and usually employed by those with beaucoup money or people who don't have a lot of money but are hell bent on giving it to their greedy children rather than pay it to a nursing home. They then qualify for Medicaid, which means the government (in other words, your and my tax dollars) pays their nursing home costs. I think you can deduce my opinion of that scheme.

Advantages of living trusts. Living trusts can help you avoid probate—the court administered legal process of settling an estate. They can also keep your financial matters private since a will is, in effect, a public document. Living trusts can also speed the transfer of your estate to your heirs, which may be particularly helpful for people who have no immediate family members capable of settling your estate. Plus, they're increasingly relied upon as more financial institutions are reluctant to accept powers of attorney due to fraud. If you anticipate any acrimony among your heirs, living trusts are more difficult to contest than wills. Finally, one situation where living trusts are usually very necessary is if you own real estate or business interests in more than one state.

Living trust disadvantages and alternatives. Privacy is often sited as a reason for establishing a living trust, but if you don't have millions, you might not care if your financial information is available to the public. Chances are no one is going to seek out that information anyway. Avoiding probate may not be an issue because probate rules or costs might not be particularly burdensome in your state. Another disadvantage is cost. Creating and administering this a living trust can be expensive, a lot more expensive than preparing a will. A lawyer may charge a flat fee, an hourly fee or a percentage of assets. There also may be fees to administer a trust once it's set up. Plus, assets must be re-titled inside the trust, a very common oversight. And fees may be charged by area governments to record the document. Then, there's always the risk that your appointed trustee may not act in your interest. It's impossible to put all of your assets into a living trust, so you'll still need a will.

If avoiding probate and speeding the transfer of money to your heirs is a concern, there are other low or no-cost options that also avoid probate, including:

  • Joint accounts, which allow assets to pass directly to the joint account holder.
  • Payable on death accounts, in which you designate beneficiaries to whom funds in the accounts will pass upon your death.
  • Life insurance, by which you designate a beneficiary to receive policy proceeds.

One common misconception about living trusts is that they save income taxes and estate taxes. They don't.

The upshot: While people with complex and sizeable estates and family issues may benefit from a living trust, most others will not benefit enough to offset the cost and inconvenience. But laws and family situations keep changing, so it's always best to talk with an estate planning attorney in your state about a living trust. Don't rely solely on the opinion of an attorney who advertises and/or offers seminars that ballyhoo the virtues of living trusts. An objective attorney should analyze all the pros and cons of a living trust and quote you a price.