It’s common advice: Put your home, maybe even other property, into a trust. All the cool kids are doing it!
It’s true that many people do just that, and it works well for them. But every estate plan is unique, and it’s important to weigh the benefits and drawbacks before you make that move yourself. Here’s what to know.
Good Reasons for a Trust
You can create a trust before or after you purchase a house; if you already own a home, it should just be a matter of recording a new deed and putting the house in the name of the trust, such as John Doe, trustee of the John Doe trust.
It’s important to note that a trust isn’t a liability protection tool. It’s an estate-planning mechanism. If you haven’t created a valid trust by the time you die, your estate must typically go through probate. As you likely know, that’s a court-supervised process that facilitates the legal transfer of decedents’ property to their beneficiaries. State laws vary on requirements for probate. For example, in California, the Probate Code provides that estates of $150,000 or more must be probated if no trust exists.
This leads us to the first and most significant pro of getting a trust—bypassing probate. It’s a common misconception that probate is required only when someone dies intestate, or without a will. However, probate is required in two situations:
- When someone dies intestate
- When someone dies with only a will
If there’s a will, the probate court will ensure its instructions are carried out. If a person dies intestate, the assets of the person’s estate will be distributed according to state law.
Let’s discuss why avoiding probate through a trust is significant and advantageous. First, the expenses associated with probate are very high. You must typically pay a probate attorney and a personal representative to navigate the estate through the probate process.
Both of these individuals’ fees are dictated by state statute and based on a percentage of the estate’s value. For example, in California, a $1 million estate would have to pay at least $23,000 to each the probate attorney and the PR to take the estate through probate.
Probate attorneys’ fees could actually end up being a lot more since they can charge “extraordinary fees” for work that’s deemed to be outside the scope of a typical probate matter, such as coaching a real estate agent on how to sell a house during probate. Additionally, the estate will have to pay court fees and related expenses on top of everything else required to administer the estate through probate.
In addition to the cost savings, avoiding probate also saves an estate a lot of time. The probate process requires that numerous documents and forms be filed with the court, and many of the requisite actions must be performed with court supervision. As a result, the transfer of property to the intended heirs is often a lengthy process. Most probates take a year or more.
Another advantage of a living trust, aside from avoiding probate, is the degree of control and specificity a trust can provide when you’re deciding what’s to happen upon your death or upon specific events during your life.
For instance, you can predetermine whom you want to be the guardian of your children if you die while your children are still minors. You can decide how much your child or young adult can spend and at what age your children are to be in full control of their financial assets. You can also set forth whom you want to handle your affairs if you become incapacitated—which avoids the need for a conservatorship, another court-supervised process.
The directives available when you’re creating a living trust are numerous and flexible. I think the last thing people want is state law to decide who gets what of their estate, and that’s exactly what happens when there’s no trust and no will.
Finally, trust documents are private and don’t become public record, as documents do in probate proceedings. Most people don’t realize how beneficial this last feature is until they open a probate matter and are inundated with people calling them to offer their services.
Why a Trust Might Not Be Best
The most obvious disadvantage to creating a trust is the upfront cost. Most trusts cost $2,500 or more to create. Next is the administrative work and cost to fund a trust—you have to contact your bank, investment and insurance companies, and so on to update your accounts. Also, you’ll need to retitle your personal and real property, such as cars, boats, and real estate, which means preparing, recording, and paying the cost of new deeds.
There are other inconveniences as well. For instance, once you become the settlor, or creator, of the trust, you’re no longer the actual owner of the assets. Therefore, if you enter into contracts relating to your assets, you must disclose the assets as trust assets. Banks and financial institutions may impose additional hurdles and administrative procedures if you seek a loan or other funding using trust assets as collateral.
Another challenge: Typically, people will amend their trust several times throughout their lifetime to reflect changes in their life or new objectives. Each amendment costs money. Administering a trust typically costs money after the settlor has died; this is to compensate the person who’s ensuring the trust’s instructions are carried out.
Is it Right for You?
So what makes the most sense when it comes to living trusts? In my opinion, the relatively small amount of money and time you’ll initially invest to create the trust outweighs the many times larger cost and longer time commitment by the estate and the persons administering the estate. I don’t see the sense in spending tons of money on administrators and executors and court fees and expenses if my other option could be to leave more to my beneficiaries.
I also know all too well the tasks and time commitment that administrators and executors must invest, and I’d prefer not to subject one of my family members or friends to such pointless tasks if those tasks can be avoided. The sad truth is that many people overlook the decision to create a living trust simply because they aren’t aware of all the benefits it can provide them and their family, especially in light of all the negative consequences of not having one.
If you believe a living trust might be a good move for your situation, I’d recommend hiring an experienced estate planning attorney to handle the matter for you. I wouldn’t recommend creating a trust with documents you download from a website.
Estate planning requires understanding the full picture and unique circumstances of your estate, and a computer-generated instrument can’t always account for your particular needs.