This article is intended for educational purposes only and is not legal advice. For guidance on your personal situation, please contact a lawyer.

Too many people underestimate estate planning because it can be a complicated and uncomfortable topic. It's still important to determine how your assets are distributed during and after your lifetime to maximize your family's financial well-being. Trusts are powerful tools that are perfect for many people, but they aren't right for everyone. Consider the strengths and weaknesses of living trusts and how they might fit into your overall financial plan.

How a living trust works

A living trust is a legal agreement that gives a person (known as a trustee) control over assets that are defined in that agreement. There can be one or multiple trustees, depending on the wishes of the person who sets up the arrangement. The person or organization that establishes a trust is known as a trustor or grantor. A trustee is often the same person as the grantor with living trusts, but they can be different parties as well.

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Trusts can be used in different ways, but they are often designed to manage the transfer of assets from a living person to other parties. In the case of estate planning, a trust can be used if your plans are too complicated or specific for a will.

Advantages of a living trust

Trusts are popular for people with complicated or extensive assets to pass along to family. They are highly customizable as legal documents, so they provide flexibility and control for estate planning purposes. Whereas a will or standard probate process pass inheritance in a lump sum, a trust can establish structured payouts over time. That's useful for beneficiaries who might receive inheritance at a young age that might encourage unwanted uses of those funds.

Revocable living trusts allow the trustor to alter the terms of the agreement. Grantors of revocable trusts can add or remove assets from a trust over time as they see fit, which is great for people with a variety of holdings across different asset classes. Beneficiaries can be changed over time as needs and relationships evolve, as well.

In many states, trusts allow people to pass assets to heirs without a court probate proceeding. That can reduce the cost of estate administration and allow for a more orderly, discreet process.

Trusts can also be valuable tools in the event that a grantor becomes incapacitated by illness, an accident, or aging. By naming a trustee, a trustor ensures that a trusted person will be controlling those assets. That's extremely valuable for people dealing with long-term care or other similarly expensive needs late in life. Assets in a living trust can be used for the benefit of the grantor if the need arises and the trust agreement so specifies, not just the people due to inherit funds.

Assets in a revocable trust at the time of someone's passing are generally still subject to estate taxes. However, for U.S. residents, the first $12.9 million of inheritance is currently exempt from estate taxation. That exemption is only $60,000 for nonresidents, so estate tax minimization is often more urgent for non-citizens who make assets or earn money in the U.S.

Drawbacks

Some families decide against using a trust for estate planning based on cost. The cost of creating these legal agreements can vary substantially depending on complexity, but they are generally more expensive than wills. There are also usually additional fees to make adjustments to revocable trusts or management fees for assets that require ongoing maintenance. The extra flexibility and control isn't worth a few thousand dollars to many households, especially if they don't intend to pass a significant amount of cash to future generations.

In addition to extra costs, setting up a trust can come with some logistical headaches. Some assets can be placed in a trust simply by naming them in the formation documents. However, some assets require coordination with banks, notaries, and local governments that recognize property titles.

Finally, it's important to consider the fact that a trust is designed to allow someone other than the grantor to have some control of assets under certain circumstances. Grantors can obviously retain control by fulfilling the trustee role, but the original asset holder is sacrificing some authority by involving another party.