Do I need a revocable living trust?
Choosing whether to fund a trust with your assets is an important decision in the estate planning process. Since a trust is different from a will, many individuals need both. Here are three main reasons you may want to consider putting your assets in a trust.
Do I need a living trust if I have a will?
Don’t think of it like a will vs a trust. A will and a trust are two different estate planning tools. Consider a will like a high-level set of instructions for after you pass away. Everyone should have a will, but not everyone needs a trust.
You generally use a will to name the executor of your estate and guardianship for your children. Although you can leave assets to your heirs in a will, it’s not an efficient way to do so, which is why many individuals utilize a revocable living trust.
How a trust is different from a will
Here are some reasons why you may want to consider a revocable living trust and a will:
- To maintain the most control over your assets after you die
- Bypass probate
- If you or your spouse has children from another relationship
- Minimize estate taxes
- Control the timing and amount of inheritances to children or adults
- Privacy
Top 3 benefits of living trusts in your estate plan
- Avoid probate
- More control of your assets
- Potential to minimize estate taxes
What is a revocable living trust?
A revocable trust (also called a living trust) is “funded” during your lifetime. At death, a revocable living trust becomes irrevocable. Funding a trust means retitling assets in the name of your trust. Unless you fund the trust, it doesn’t really serve a purpose.
During your life, you can add, use, or remove assets in the trust. There are no changes to the tax treatment of these assets. You, the owner of the property, are the grantor of the trust and trustee.
In the trust document, a spouse or other family member can be a co-trustee, and you can also name a successor trustee. This makes managing your financial affairs much easier in the event of death, incapacitation, or even a long trip overseas.
Trust benefit #1: A revocable trust can help you avoid probate
What happens to property not put in trust? Depending on the type of assets and how it is titled outside of trust. But probate is a likely outcome for property not put in trust.
Putting assets in a revocable trust allows you to avoid probate. Essentially, assets that don’t pass directly to your spouse or heirs include most anything else you own that doesn’t pass via beneficiary designation or a type of joint ownership.
So you don’t always need a trust to avoid probate (depending on the property), but sometimes you do.
This can include a bank account, brokerage account, home, car, art, and even equity in a privately held business. Most individuals have assets that would otherwise be subject to probate – that’s where revocable living trusts come in. If assets are put into trust, or set to be once the owner dies, that asset will skip the probate process.
Reasons to avoid the probate process
Time, money, and privacy.
Probate is a legal process where certain assets that were owned in the individual’s name are distributed by the probate court. The probate court will use the will to help guide their distributions and other decisions. However, a will can be contested, so there’s no guarantee your wishes will be followed.
All probate assets must go through probate court before they’re distributed according to your will (if you had one) or at the court’s discretion. Because the probate process is long, costly, and public, many investors choose to avoid probate whenever possible.
A retirement account won’t go through probate unless you didn’t name any (living) beneficiaries. Life insurance proceeds also skip probate if you name beneficiaries (assuming the beneficiary wasn’t your estate).
If you have a payable on death (POD) or transfer on death (TOD) on your bank account, then it will generally bypass probate too. Typically, assets held jointly with rights of survivorship, community property, or tenancy by the entirety will also avoid probate if the joint owner is living.
Trust benefit #2: Trusts help ensure assets are distributed as you wish
Again, without a trust you lose a lot of control about who-gets-what (and when) upon your death. A trust allows you to control everything for decades, assuming it does not conflict with the law. For example, instead of letting an 8-year-old inherit a rental property or investment account outright, you can include age-based milestones and other provisions to help ensure the assets aren’t squandered.
You can also name a third party to serve as successor trustee, including a corporate trustee. Trustees have a fiduciary duty to abide by the terms of the trust and make distributions to beneficiaries accordingly.
What are common terms of a trust?
It depends on the individual or couple’s goals, but typically, spouses arrange for varying levels of access during the surviving partner’s lifetime with the remainder to children or relatives. (Limiting access can provide estate tax planning benefits for some).
Individuals might also decide (at the death of the first and/or second spouse) to leave assets or money to other family – aging parents, children from a different relationship, relatives, friends, charity, etc.
A trust can also help safeguard assets for minor children, provide for individuals with special needs, include terms if the survivor remarries, and also identify a successor trustee in the event of your disability, among other things. In contrast, if assets go to a spouse or heirs outright, these protections are lost.
Trust benefit #3: Trusts can help minimize estate taxes
The federal estate tax exemption for married couples is $13.61M per person in 2024 and portable between spouses. But some states, like Massachusetts, have their own estate tax and a much smaller exemption amount.
The Massachusetts estate tax exemption is currently $2M per person and unlike the federal exemption, the amount isn’t portable. Using a credit shelter trust or marital trust after the first spouse dies helps preserve the exemption. In this example, assets up to the exemption amount ($2M in this example for Massachusetts) would flow from a decedent’s living trust to a credit shelter trust and the remaining assets (if any) would flow to other trusts (a QTIP trust, family trust, etc.). If the surviving spouse dies later in the year, the credit shelter trust would generally bypass the taxable estate. This can reduce or eliminate estate tax at the state level altogether.
Types of property you can put in a living trust
Different types of assets can be put into a revocable living trust during your life, though some are subject to state laws:
- A home, vacation home, or rental property (read more about the pros and cons of putting a house in a trust)
- Savings or checking accounts
- A brokerage account with stocks, bonds, ETFs, and mutual funds
- Ownership in a small business or private company
- Cars
Other types of assets can only flow into a trust after death:
- Retirement account, if the trust is a beneficiary
- Life insurance, if the trust is a beneficiary
- Naming your living trust as the payable on death or transfer on death designee
There are several important considerations before putting an asset in trust or naming your trust as a beneficiary. Discuss your estate plan in detail with your attorney.
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How to set up a trust
You’ll want to find a trust and estate attorney to assist in drafting your estate plan. The cost of legal fees will depend on a variety of factors, most notably how complex the trust will be.
Estate and tax law varies by state, so you’ll need an attorney licensed in your state.
And if you do draw up a trust, make sure to follow through and get assets retitled into the name of the trust. This is called funding a trust. Otherwise the trust document has no power to control how your assets are handled.
Other considerations before putting assets in a trust
- Consider a joint trust vs separate revocable trusts if married
- Couples with separate revocable trusts should consider naming each other as a co-trustee for ease of administration during life and at death
- Is the goal probate avoidance or creditor/liability protection? A living trust can help with the former, but you may want to explore other ways to protect your assets such as an LLC, personal umbrella liability policy, or even an irrevocable trust
- What are the future tax implications?
- If married, do you and your spouse have similar legacy goals and beneficiaries? A revocable living trust helps ensure your wishes are kept with your assets, assets that remain after you and your spouse are gone, or in the event they remarry
Trusts can be an efficient way to accomplish your goals, but they’re not the solution for every problem. Work with an attorney in your area in conjunction with your financial advisor and CPA to develop a coordinated strategy that meets your needs.
Important disclosure: The material in this article is intended to provide generalized information only as to some of the financial planning considerations of revocable trusts and should not be misconstrued as the rendering of personalized legal or tax advice.
[Last reviewed October 2024]
