Countless people will tell you that a significant reason behind them working hard and accumulating wealth is because they want to be able to leave a nice inheritance for their family. It's a common aspiration, including for myself.
Unfortunately, the process isn't always as straightforward as most people would like. This is especially true for people without a living trust. A living trust is a legal arrangement that makes the inheritance process smoother, more private, and more efficient.
For anyone planning to pass on an inheritance, it's wise to consider a living trust. Here are three reasons why.
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1. You can avoid the probate process
Arguably the biggest reason for using a living trust is to avoid probate, which is a court process used to determine a will's validity and oversee the process of distributing the deceased person's assets. Probates can be lengthy, often taking months or even years to finish. During this process, your beneficiaries likely won't have access to the assets they're entitled to.
Time aside, probates can be costly. Between court costs, lawyer fees, and other expenses, the process can eat into the inheritance left behind. For example, in California, probate attorney fees and executor commissions are based on the gross value of the estate as follows:
- 4% on the first $100,000
- 3% on the next $100,000
- 2% on the next $800,000
- 1% on the next $9 million
- 0.5% on the next $15 million
- A court-decided amount for any estate valued over $25 million.
A living trust helps avoid probate because assets held in the trust are technically no longer owned by the person. This means when you pass away, the trust assets can typically be distributed to your beneficiaries without court intervention, saving time and money.
2. You have more privacy with a living trust
An underrated aspect of a living trust is the privacy it can provide compared to a will. When a will goes through the probate process, it becomes a public document that anyone can access. People can potentially get information about your assets, their value, and who inherited them.
With a living trust, details about the trust -- including its assets and beneficiaries -- generally don't become part of the public record. This can be especially helpful for high-profile individuals or people who want to avoid potential conflicts within their families.
For example, let's imagine someone leaves a large inheritance to a younger beneficiary who isn't yet equipped toe a large sudden influx of wealth. If the distribution was made through a will, it would become public, and the beneficiary could face pressure from relatives, friends, or financial predators looking to take advantage of them. A living trust could help the beneficiary avoid this outside pressure because it remains private.
3. There's plenty of flexibility to adapt to changing circumstances
Living trusts are also known as revocable trusts, meaning they can be changed or revoked entirely while you live. This flexibility is important because it allows you to respond to changes in your life circumstances. You could get married, divorced, have more children, or experience a huge change in your financial situation. Whatever the case, having the option to modify your living trust is extremely useful.
Changing a living trust is usually a straightforward process. If the changes are minor -- like adding a beneficiary -- a simple amendment should be good enough. For more significant changes -- like an overhaul of the distribution process -- you may need a complete restatement of the trust. Either way, being able to update your living trust ensures that it reflects your current circumstances and wishes.
You can also decide to convert your revocable trust into an irrevocable one. This is typically done for tax planning or asset protection reasons. It cements the trust's terms and potentially surrenders some or all of your control over the assets. Converting a revocable trust to an irrevocable trust isn't the move for everyone, but it shows the broad range of options and flexibility a living trust has.
