Estate Planning: Living Trusts

Living trusts are created with a clearly defined objective: to avoid probate. Misconceptions about living trusts have spread to the point where people think trusts can accomplish much more than they are designed to. But if you are worried about your will being contested or your heirs fighting over your assets, a revocable living trust may be your best option.

You fund a revocable living trust with all, or largely all, of your assets during your lifetime. The trust owns the assets, but you can still use and control them while you’re alive. Once you die, the revocable living trust becomes irrevocable, and the assets in the trust are distributed according to your wishes by designated successor trustees, who are exempt from probate.

In addition to giving you more control and privacy over your assets, a living trust may save your heirs time and money. The probate process can take years and typically costs between 3-7% of the total value of an estate.¹

Living trusts do not reduce taxes

Assets within a living trust are fully taxable at the federal and (generally) state levels. Unless someone has drafted the trust to include tax-saving provisions, it will offer no specific estate or income tax advantages to the grantor or beneficiaries.

Living trusts lead to a lot of paperwork

As the trust must become the legal owner of your assets to be effective, the title of assets in the trust needs to be changed. This means filling out a myriad of forms and revising others. Expenses may also be incurred along the way.

Living trusts do not relieve trustees of their duties

When a grantor of a living trust passes away, the language in the trust document will not magically “do all the work” for the successor trustee. While a successor trustee will usually not have to deal with probate, other responsibilities will remain. Titles will need to be changed, and appraisals may be necessary.

A living trust costs money

A lawyer may charge you $1,500 or more to create one. If you have significant assets and fear a dispute over your will, it may be worth it to establish a trust.

The Internet, books or software offer available living trust solutions. However, when cutting and pasting boilerplate language and filling in some names here and there, what kinds of legal and financial risks are you taking?

While engaging the help of an attorney when drawing up a living trust is certainly advisable, paying a lawyer fee is no guarantee of competence; amending simple errors could cost you another $300–500.

A living trust is not a will

You still need a will, even if you have a living trust. In fact, you are probably going to need a “pour-over” will down the road, assuming you will keep accumulating assets after the trust is drawn up. A pour-over will place these stray assets into the trust.

Additionally, you will want a will if you wish to make charitable bequests or gifts to friends or relatives upon your passing, as a living trust may not carry out these gifts on your behalf. A will is also the way to name a guardian for any minors.

A living trust is not a living will, either

Furthermore, a living trust does not function as a healthcare directive or a power of attorney. These are separate estate planning documents. While some families ask attorneys to create these documents concurrently with a living trust, a living trust won’t stand in for them.

While living trusts are touted and can be highly useful, that does not mean that every family should establish one.

You may not need a living trust to begin with

If your financial life has been largely free of “creditors and predators” and your estate isn’t complex, a thoughtfully drafted, well-executed will could prove sufficient when the time comes. For some middle-class families, a living trust can be like a fifth wheel on a car—seemingly providing added stability, but hardly necessary.

After all, not all assets are subject to probate when someone passes away. That includes your IRA, Keogh and pension plan savings, life insurance death benefits, checking and savings accounts that have POD beneficiaries, treasury bonds and property owned jointly with the right of survivorship.

Furthermore, in terms of time, there often isn’t much difference between distributing assets via probate and through a living trust. In terms of savings, the filing of documents and court fees that come with a probated will may not be that onerous. While the fees may total a small percentage of the value of the estate, the executor may decline a commission if he or she is a family member and requires only hourly legal advice.

You should not attempt to create a retirement plan trust without an attorney’s help. As an example of what can go wrong for do-it-yourselfers, the 60-day rule that applies to indirect rollovers of qualified retirement plan assets does not apply to inherited IRAs. If you make an indirect rollover of such assets and take possession of them on the way to set up the trust, you will be considered to have received taxable income, even if you complete the rollover process within the 60-day window. To do this without being blindsided, seek those with the right knowledge.

As always, let us know if you have any questions.

Best, 

CRA Investment Committee 

Matt Reynolds CPA, CFP®

Tom Reynolds, CPA 

Robert T. Martin, CFA, CFP®

Gordon Shearer Jr., CFP® 

Jeff Hilliard, CFP®, CRPC®

Joe McCaffrey, CFP® 

Phillip Tompkins 

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