When it comes to estate planning, some people create wills and leave it at that. Others, however, establish trusts that offer certain benefits that wills simply cannot. A trust is an agreement that allows a third party, known as a trustee, to hold and manage assets for a designated beneficiary. Though there are different types of trusts, revocable living trusts are a popular estate planning tool because of their inherent flexibility. With a revocable living trust, you, as the benefactor, have complete control over your assets as long as you're alive. You can revoke or change the terms of your trust at will to ensure that your assets are available to you and disbursed to your beneficiaries as you see fit.
How revocable living trusts work
When you set up your trust (typically with the help of a lawyer), you can appoint yourself as its trustee, which gives you the authority to manage whatever assets you transfer to be covered under that trust. Such assets might include real estate, stocks, bonds, or even cash.
While you're alive, you can maintain control over those assets and reap any benefits from them as you see fit. You also get the right to amend the terms of your revocable living trust, or even terminate it altogether. Upon your passing, whoever you name in your trust document as your successor trustee will be responsible for managing the assets covered under the trust. That trustee must then disburse those assets as per your instructions.
Benefits of revocable living trusts
One major benefit of revocable living trusts is that they allow your estate to avoid probate. Probate is the legal process by which a court decides how to distribute assets after a person's passing. Not only can probate be complex and time-consuming, but it can also get expensive. With a living trust, your beneficiaries can get their hands on whatever assets you leave them as soon as possible.
Another advantage of revocable living trusts is that they help protect your privacy. If you create a will that's filed with a probate court, that document becomes public record, whereas with a living trust, only your beneficiaries and trustee are privy to the information contained therein. Furthermore, if you become incapacitated while your trust in is effect, your successor trustee can simply take over the management of your assets, and you can avoid the potentially complicated process of establishing a conservatorship.
Drawbacks of revocable living trusts
While there are plenty of good reasons to establish a revocable living trust, there are also some disadvantages to consider. First, revocable living trusts cost money to set up -- more money than you'd typically spend on a will. That said, if you're willing to deal with the up-front cost, you might actually save money in the long run by avoiding the expense of probate.
Another downside of living trusts is that transferring assets can be both time-consuming and complicated. If you hold a variety of assets, you'll need to contact your different banks and agents to have everything you own moved over -- a process that could involve a fair amount of paperwork.
Additionally, a living trust doesn't negate the need for a will. Most people who set up living trusts inevitably fail to transfer all of their assets. If you have leftover assets not covered by your trust, you'll need a will to dictate how those assets will be distributed after your death. Furthermore, you can't use a living trust to appoint guardians for your children; you'll need a will to accomplish that.
So what should you do?
If you don't have much in the way of assets, you may be better off with a standard will instead of a living trust. Because you'll spend a fair amount of money to establish your trust, from a purely financial standpoint, the only way to "recoup" that expenditure is by saving money on probate. While the cost of probate varies, it can easily equal 5% or more of the value of your estate.
So let's say it costs $3,000 to establish a living trust. If you have a $200,000 estate, you might lose $10,000 to probate, in which case spending the money to avoid that process makes sense. But if your estate is only worth $50,000, you may not recoup what you spend up front.
If you live in a state where the probate process is costly and complex, and you know that the value of your estate is high enough for it to be subjected to probate, you should consider a revocable living trust. Similarly, if you're worried about the estate tax, you might establish a living trust with strategic tax-planning provisions. A revocable living trust can be a useful estate-planning tool, so take the time to investigate whether it pays to set one up.