Is a living trust right for your estate-planning needs? Check out these pros and cons
Stephen J. Lacey
4 min read
A living trust, also called a revocable trust, is a widely used estate planning tool that allows individuals to manage and control their assets during their lifetime and determine how those assets will be distributed after death. The trust is set up during an individual’s lifetime and allows them to transfer ownership of their assets while keeping full control.
The grantor of a trust can change, modify, or revoke the trust at any point. Upon the grantor’s death or incapacity, adesignated trustee will manage and distribute the assets according to the trust’s instructions. Living trusts are a popular estate planning tool because they offer flexibility and can make asset transfers much simpler. However, like any legal document, they come with both benefits and potential downsides, which you should carefully consider before deciding your estate plan.
Pros of a living trust
Avoiding probate and preserving privacy: Avoiding probate is often one of the most appealing aspects of creating a living trust. Probate can be a drawn-out, expensive, and a public process, which many families find overwhelming during an already challenging time. A living trust, however, allows assets to go directly to beneficiaries without court involvement, saving time, money, and keeping your financial matters private. Moreover, since probate is public, anyone can access those records, while a trust remains private between the grantor, trustee, and beneficiaries.
Incapacity planning: Another benefit is that a living trust includes can include provisions for what happens if a grantorsuddenly becomes incapacitated. If an individual is no longer able to manage their assets, the successor trustee can step in without requiring court intervention, avoiding the need for a potentially stressful and expensive guardianship or conservatorship.
Flexibility and control: Because a living trust is revocable, the grantor retains full control over the trust’s assets. A grantor can adjust the trust’s terms, add or remove beneficiaries, or even dissolve the trust if their situation changes. This is particularly helpful for individuals as our lives evolve over time — whether it is welcoming a new family member, changing marital status, or accounting for changes in wealth. Additionally, living trusts allow the grantor to set specific conditions on how and when beneficiaries receive their inheritance. For example, an individual might decide that a minor can only access their inheritance once they reach a certain age or meet certain conditions, offering more control than a simple will.
Managing assets in multiple states: For individuals who own property in multiple states, a living trust can simplify the transfer process. For example, without a trust, probate must be opened in each state where property is owned, which can be complex and costly. Placing out-of-state properties into a living trust allows for a single, unified transfer.
No protection from creditors: One of the primary downsides of a living trust is that it generally does not shield assets from creditors. Since the trust is revocable, assets within it are still considered the property of the grantor. Meaning, that if the grantor is sued, creditors can reach the assets in the trust in an attempt to satisfy a judgment
Costs, complexity and maintenance: While a living trust offers many benefits, it also requires a bit more effort and investment upfront compared to a simple will. It is crucial that the trust is established correctly to avoid any misunderstandings or potential litigation. The process involves legal fees, time, and attention to detail to ensure everything is properly aligned. Moreover, unlike a will, a living trust requires ongoing maintenance. Each time you acquire new assets, you need to ensure they are titled correctly in the trust’s name. If this is not done, those assets may be excluded from the trust, leading to future complications. Keeping your trust up to date takes consistent attention and, often, continued legal guidance.
Stephen J. Lacey, JD, LLM, is a member of the law firm Lacey Lyons Rezanka.
Limitations on tax Benefits and Transferable Assets: Living trusts do not provide estate tax benefits. Since they are revocable, the IRS considers the trust’s assets to be part of the grantor’s estate. For those seeking to minimize estate taxes, an irrevocable trust may be a better option, though it comes with less flexibility and control. Additionally, certain assets cannot be easily transferred into a living trust, such as retirement accounts. Placing these types of assets into the trust may trigger unintended tax consequences; however, you should consult with your estate attorney to discuss specific estate tax plans.
So should you create a living trust?
Whether a living trust is the right choice for your estate plan depends on your individual circumstances and goals. Before creating a living trust, it is advisable to consult with an estate planning attorney to discuss specific needs and determine the best course of action. With careful planning, a living trust can be a valuable tool for protecting your assets, providing for your loved ones, and ensuring that your wishes are honored.
Stephen J. Lacey, JD, LLM, is a member of the law firm Lacey Lyons Rezanka. His practice areas focus on estate planning and probate.
