Ask two financial experts about the benefits of using a revocable living trust and you might well get precisely opposite reactions, especially on a regional basis. One might say that it’s the greatest thing since sliced bread, while the other could argue that it should be avoided like the plague. The truth probably lies somewhere in between.
How does a living trust work? You set up the trust, transfer assets to it, and name a trustee to handle matters. If you designate yourself as the “initial beneficiary,” you’re entitled to receive income from the trust for the rest of your life. At the same time, you designate “secondary beneficiaries”—perhaps your spouse, your children, or both spouse and kids—who will receive the remaining assets when the trust terminates.
Significantly, you can still retain some control of assets in a living trust while you’re alive. For instance, depending on the trust terms, you may be able to sell assets and keep the proceeds, amend terms of the trust (for example, change secondary beneficiaries), or revoke it entirely. The assets in the trust become irrevocable upon your death.
The main advantage is that assets in a living trust are exempt from probate, a process that may be required for assets bequeathed through a will. Proponents of living trusts note that the probate process can be costly and time-consuming. Also, if you face physical or mental limitations in your old age, with a living trust, a trustee for your assets is already in place.
However, detractors point out there are less expensive ways of avoiding probate, such as acquiring property jointly with rights of survivorship (although this may not be the best option in community property states). Also, the cost and complexity of probate is often exaggerated and can vary greatly from state to state. Finally, despite a common perception to the contrary, there’s no estate tax advantage to using a living trust if you retain the right to revoke it, as is typically provided. And even die-hard supporters of living trusts acknowledge you’ll still need a will to tie up the loose ends of your estate.
So when does a living trust make sense? Consider these four key factors:
1. Age. Younger people in good health have less incentive to use a living trust than do retirees. Remember, a living trust will provide little benefit during your life.
2. Financial status. The more wealth you have, the more you’re likely to benefit from a living trust. It will make things easier on your heirs if some or all of your assets bypass probate.
3. Marital status. If you’re married and you own a house or other main assets jointly with your spouse, there’s less need for a living trust. Furthermore, many states allow surviving spouses to use expedited probate procedures.
4. Confidentiality. One of the main arguments for a living trust is that your testamentary disposition remains confidential. This could be important for some families.
Don’t be swayed by the hype of either point of view. Make an assessment of whether a living trust is right for you.
This article was written by a professional financial journalist for McCarthy Asset Management, Inc and is not intended as legal or investment advice.