Revocable living trusts have become popular estate planning tools. Whether a living trust is right for you, however, depends on several factors.
A living trust is a trust that you set up during your lifetime and to which you transfer most or all of your assets. You receive the income from the trust and also have the right to withdraw principal. You can revoke or cancel the trust at any time during your life. At death, the trust becomes irrevocable (meaning that it cannot be modified) and its income and assets are disposed of under terms specified by you in the trust documents. You have the same flexibility to dispose of your assets by means of a trust as you do with a will.
Why would you do this? The most commonly cited advantage of living trusts is that, upon the trust owner’s death, trust assets are distributed without going through the probate process. By avoiding probate, people generally expect to reduce or eliminate executor and/or attorney fees and probate court costs. These savings often may be smaller than expected, however. First, it is difficult to avoid probate and some probate costs altogether, unless title to all of your assets, including your personal property, is transferred to the trust. Transferring title to mortgaged real estate or personal possessions may be impractical or undesirable, which is why a so-called pour-over will is used in conjunction with a living trust. A pour-over will ensures that the assets in your probate estate are distributed to the trust so that the assets can be administered according to the terms of the trust. A probate proceeding also may be required if you have minor children. Although a trustee can administer your assets to safeguard a child’s financial well-being, only the probate court can appoint someone to act as a child’s guardian.
Second, although using a living trust to reduce your probate estate may save attorney’s fees for administering the estate, attorney’s fees are incurred at an earlier date when the attorney establishes and transfers your assets to the trust.
Third, if trust assets must be retained and administered before they can be distributed, the trustee’s fees may approximate those of an executor. Even with a trust, a period of administration may be necessary to file income and estate tax returns, collect assets, pay debts, and distribute assets.
Tax Consequences
Perhaps the greatest misconception concerning living trusts is that they reduce federal estate taxes. This is not the case — transferring your assets to a living trust does not remove them from your gross estate, so the assets remain subject to estate tax. This misconception may be based on a standard estate planning technique for married individuals where a trust is established at the first spouse’s death in order to use that spouse’s applicable exclusion amount ($15,000,000 in 2026). However, such a trust can be established under either a living trust or a will.
In fact, a living trust is tax neutral in terms of both estate and income taxes. A living trust can provide the same estate tax planning flexibility as a will. As for income taxes, the owner of a living trust is taxed on its income as if the assets were owned outright. A separate tax return generally is not required.
Advantages of a Living Trust
Although the anticipated savings of a living trust must be carefully evaluated, living trusts do offer several advantages other than reducing the cost of passing your assets to your beneficiaries.
Incapacity. A living trust is an excellent means for planning for incapacity. The trust can instruct the trustee or successor trust to manage your assets and provide for your financial support. A durable power of attorney can also authorize your agent to transfer additional property to the trust. Thus, a living trust and durable power of attorney can avoid the need for a court-appointed conservator.
Speedier distributions. Upon your death, the trustee of a living trust can begin to make distributions to surviving beneficiaries without the delays and procedures that the probate process requires. Delays are also avoided with joint accounts, insurance proceeds, and other assets that pass directly to the beneficiary without going through probate.
Out-of-state property. A living trust can be very beneficial if you own real property in more than one state because separate probate proceedings are required in every state in which you own property. Transferring such property to a living trust avoids the need for multiple probate proceedings.
Avoidance of disputes. A living trust offers an advantage over a will if you anticipate discord among your beneficiaries. Unlike a will, family members do not have to be notified of the existence of the trust. A living trust also may withstand legal attacks better than a will.
Although a living trust may provide advantages, it is important for you to have a realistic expectation of what a living trust can accomplish so that you can make an informed decision as to whether such a trust is appropriate for you.
