A living trust is an estate planning arrangement that lets you specify who will manage your assets if you become incapacitated, and who will inherit them after you die.
In the meantime, you retain complete control over the assets. You may also modify or revoke the trust at any time.
The main advantage of setting up a living trust over drafting a will is that your heirs don’t have to go to probate court.
If you’re at a stage of life where you’re thinking about estate planning, you may have asked yourself, “Why should I put my home in a living trust? Won’t a simple will do the trick? And if I want to set up a living trust, where do I even begin?”
Questions like these can be daunting, but the mere fact that you’re asking them puts you ahead of the crowd.
In 2022, only 33% of American adults had estate planning documents, and 31% of those who saw a growing need for an estate plan had done nothing about it.
The other good news is that estate planning isn’t complicated if you arm yourself with high-quality information, and work with experts such as financial advisors and estate planning attorneys.
This article explains the basics, including what living trusts are, how they work, their pros and cons, and how to set one up.
A living trust is one of the two most common estate planning documents in the United States. The other one is a last will and testament.
Both arrangements enable you to specify which of your loved ones will receive your assets after you die. You can use the documents to build a custom plan for transferring assets with titles, including:
Unlike other trusts, you can modify, dissolve, or rescind a living trust at any time. This is why people also call them revocable trusts.
You also retain full access to any assets you place in the trust. You may take your home out of the trust, sell or refinance the property as you see fit without special permission.
When you set up a living trust, you become its settlor or grantor, depending on the state you live in. As a settlor or grantor, you transfer the ownership or title of your assets to a trustee. We call this “funding the trust.”
Typically, you assign yourself as the trustee, allowing you to keep full control over the assets and manage them as you wish. As a trustee, you can do everything you could do before. You may buy, sell, gift or mortgage the assets. You can also change or cancel the trust at any time, and even file the same tax return as before. The only thing that changes is the name on the titles.
In addition to appointing a trustee, you need to specify the trust beneficiaries. These are the people who will inherit the assets after you die, such as your spouse, children or grandchildren.
Finally, you will designate a successor trustee. This person will manage the trust after you die or become incapacitated, including settling your estate and distributing the assets to the beneficiaries.
Here are some advantages of placing your home in a living trust.
You Avoid Probate
Probate is a legal process in which a court ensures that your estate doesn’t owe any debts and your heirs get a fair distribution of the assets after you die.
All wills must go to the probate court, but living trusts don’t. This has several benefits, including:
Cost savings: Probate is expensive. You have to pay legal, executor, inventory, court and other fees. If you own properties in more than one state, your heirs will face multiple probates, further increasing the costs. The expenses also go up if the estate is large, complex or there are disputes among heirs. The total fees typically amount to anything between 3% and 8% of the estate’s total value. In contrast, the average attorney fees for setting up a living trust can be as little as $1,000-2,000.
Time savings: The probate process can take several months, or even years if anyone contests a will. A living trust enables your heirs to receive your assets in weeks, or even days.
Privacy: Probate proceedings are public. Anyone can look up the size of your estate, the names of your heirs, what they’ll get and when they’ll get it, how much debt you owed, and more. The process also opens up the potential for potential heirs and creditors to contest your will. In contrast, the contents of a living trust remain private.
A will only kicks in after you pass away. In contrast, a living trust enables you to manage your assets before you die in the event of incapacitation. It can also protect you from a conservatorship, under which a court-appointed guardian manages your affairs for you.
To place a property in a living trust, you need to do the following:
Set up the trust. Draft a trust document outlining the trustee, successor trustee, beneficiaries and terms upon which they will receive the assets.
Prepare a new property deed. Copy the old deed and update the necessary information.
Notarize the deed. You and any other property owners must sign the deed in front of a notary public to authenticate it.
File the deed. Record the property transfer with your county clerk’s office.
A living trust can offer many benefits, but it’s not for everyone.
What Are the Disadvantages of a Living Trust?
For instance, the expense may not be worth it if you plan for other assets to go through probate.
Additionally, some lenders may not allow you to buy or sell real estate in the name of a trust. You may have to take the property out of the trust before selling or put it in after buying.
If you’re a homeowner thinking about estate planning, you also may have considered tapping into that equity for immediate cash needs. A home equity agreement (HEA) may be a good option. With a HEA, you get a lump sum of cash now, and the home equity agreement provider receives a share in the profit when your home sells in the future. There are flexible income and credit score requirements, and you don’t make monthly payments or pay interest.
To learn more about HEAs and living trusts, contact Unlock Technologies.
A living trust could also delay the process if you wish to tap into your home equity or refinance a mortgage.
If you’re looking for an alternative way to access your home equity, consider a home equity agreement from Unlock Technologies.
Unlock Technologies staff writer