In recent years, revocable living trusts have been touted as a simple, cheap supplement to wills. But are they?
It's called a living trust because you set it up and put some or all of your assets into it during your lifetime. Typically, you serve as trustee which gives you control of the assets until death. After your death, they are distributed according to the terms of the trust document and don't go through probate, which can be costly and time-consuming.
While a useful estate planning tool in some instances, living trusts are not for everybody. Here's a look at some of the pros and cons.
Business Succession. If you own a business, the trustee can manage it without interruption after your death until your heirs can take over, or until it can be sold -- if that's your desire.
Avoiding Probate. Under a will, an estate must be settled in probate court and is a matter of public record. Lawyers' fees and court costs often are substantial, and proceedings can drag on for a year, two, or more. Living trusts are generally settled without court intervention, so the process could be quicker, cheaper and more private, although this isn't always the case. Local laws should be examined to confirm whether privacy can be ensured.
Flexibility. Since you can amend or revoke the trust at any time while you're alive, you can get the trust property back whenever you wish.
Control. A living trust can provide a single receptacle to receive and distribute assets on your death. Non-trust assets like life insurance proceeds can be left to your trust if you name it as beneficiary (although the proceeds will be subject to estate taxes if you own the policy at death). Also, where allowed by law, any assets not held in trust can be left in your will and passed to the trust after your death by the terms of the will. Thus, the trust can unify your estate so that it can be administered under one document.
Asset Management. If you become disabled or otherwise unable to manage your financial affairs, a living trust and durable power of attorney enable your spouse or anyone else you've named to act on your behalf to manage your assets without time-consuming court intervention. Note, however, in some instances a court-appointed conservator may still be needed.
Tax Myth. Unless properly drafted, a revocable living trust won't save you a dime in estate taxes. For many wealthy individuals, their priority is reducing estate taxes, not just probate.
Not a Will Substitute. You still may need a will. Living trusts could be a supplement, but not a substitute for your will. You'll need a will to pass on assets not previously put into the trust, to appoint an executor to administer your estate, and to name a guardian for your minor children, among other reasons.
Costs/Hassles. As with any trust, you'll have to pay legal fees to set it up initially, and possibly ongoing trustee fees if you use an institution such as a bank, or other trustee. And it can be costly and difficult to transfer legal title to your business, home, bank accounts and securities into the name of a trust. Before refinancing your home, for instance, your bank may insist that the title be removed from the living trust back into your name.
Another Factor. If probate is an important concern, the kinds of estate assets should be looked at. Two of your biggest assets -- your life insurance policy and pension plan -- can be designed to go directly to your designated beneficiaries without passing through probate. And since assets owned jointly by you and your spouse pass by contract or deed, a living trust isn't needed to avoid probate.
S Corporations. If your corporation is an S corporation, certain legal issues must be considered. If shares are transferred into the trust, the S election may terminate if the trust isn't properly structured.
While not a panacea, revocable living trusts may be valuable in some states where probate is costly and complicated. However, since living trusts may not work to your advantage, it's best to consult a legal advisor and a financial counselor to determine whether it should be part of your estate plan.
By Scott L. Deaton, CFP®, MBA
Mosaic Consulting, LLC
In conjunction with Lincoln Financial Advisors, a registered investment advisor
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Scott L. Deaton, RFC, MBA, is a registered representative and investment advisor representative of Lincoln Financial Advisors Corp., 370 Southpointe Blvd., Suite 200, Canonsburg, PA 15317, phone 724-743-6159, offering insurance through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.