Ask Money

When to trust a living trust

Chris Farrell Jan 18, 2011

Question: What is a good way to get information on the pros and cons of making a living trust? Sam, St. Louis, MO

Answer: Trusts are a hot topic in estate planning circles–perhaps too much so. They date back to the early 1500’s in England, when feudal landowners began shifting legal title of their land to third parties while retaining the benefits of ownership. Well, we don’t have to worry about feudal rules anymore. But trusts remain, and the business is thriving.

The most popular kind of trust is the simplest, a living trust. Here is a basic definition of a living trust (although when it comes to any kind of trust the safe bywords seem to be embedded complexity and many exceptions to the rule).

A living trust is created while you’re alive. It involves transferring ownership of property — your home, your stocks, bank accounts, mutual funds and the like — to the trust. You can serve as the trustee or you can choose someone else to be the trustee or an institution. And example is a bank trust department.

A big advantage of a living trust is that it allows your estate to avoid going through probate when you die. In some states probate is famous–infamous really–for dragging on for months. The reason the property avoids probate is that the trust owns the property and not you. When you die the only property that must go through probate is in your name. The trust property passes to your heirs outside of probate.

I’m not a big fan of living trusts for the average working and middle class family. One situation where a trust makes a great deal of sense is if you own property in several states. The trust allows your estate to avoid going through probate in those several states. Similarly, if it’s important for you to keep your finances private you’ll want to establish a trust.

What are some of the downsides of a living trust? A trust takes time to set up with lots of paperwork–and then you need to maintain the trust. A poorly drawn trust will cost you money and could put your estate plan at risk. You need to find a good professional to draw up the trust, and that costs money, typically in the $2,000 to $3,000 range. You’ll still need a will even with a trust. And in many states the probate process has been greatly streamlined. The horror stories are just that–stories.

Sad to say, the living trust business has attracted more than its fair share of unscrupulous operators. They’ll promote living trusts at retirement seminars and send out flyers inviting people to call for an in-home appointment. The pitch is that you’ll really need a living trust to financially protect your family after you die. It’s the only way to spare your survivors the fearsome process of probate. Your heirs can avoid some tax bills, too. Or so we’re told–not. The Federal Trade Commission has issued a warning about living trust promoters:

A good resource for investigating living trusts is Nolo.com, the self-help legal organization. It’s more positive on them than I am. You can start your research here: Why You May Not Need a Living Trust.

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