Estate planning can be tricky, especially with the uncertainty of a rocky global economy. But that’s precisely why estate planning is so critical to ensuring a secure financial future for you and your family. One way to create this security is to put your home, and other high-value assets, into a trust. We’re covering exactly what a trust is, how it can be used, and the pros and cons of putting your assets in one.
What is a Trust?
A trust is a fiduciary relationship in which one party, the trustor or grantor, gives the second party, the trustee, the right to hold assets/property for a third party, called the beneficiary. When the trustor dies, the trustee ensures that the assets are distributed according to the trustor’s wishes directed in the trust document. The trust document can also establish how the assets and money are used while the trustor is alive. Not only does a trust outline the trustor’s wishes, but it can also provide legal protection for the trustor’s assets; trust assets can avoid taxes and probate and protect assets from creditors.
Different kinds of trusts serve different purposes:
- Revocable vs. Irrevocable – A revocable trust can be changed or terminated by the trustor during their lifetime and can serve to benefit the trustor while they are alive. An irrevocable trust cannot be changed once established because ownership of the assets lies with the trust and not with the trustor. This is what allows an irrevocable trust to avoid estate taxes. A revocable trust typically becomes irrevocable upon the trustor’s death.
- Living vs. Testamentary – A living trust determines how an individual’s assets can be used to the individual’s benefit during their lifetime. You can be the trustee of your own living trust and can name a co-trustee (for example, a spouse) to continue managing the assets in your trust. A testamentary trust outlines how an individual’s assets are designated after their death and can only be irrevocable.
- Funded vs. Unfunded – A trust is funded when the individual titles assets in the name of the trust, whereas a trust is unfunded when assets are not titled in it.
Pros & Cons
Now that you know what a trust is and what it can be used for, you need to weigh the benefits and disadvantages.
There are many positives of putting your home and other assets in a trust, some of which are noted above. First and foremost, titling assets to a trust makes certain that your beneficiaries won’t get tied up in probate. This saves everyone time and money. Probate is the legal process ensuring you have no outstanding debt and that your assets are distributed according to the law. Assets in a will, for example, are subject to probate.
Unfortunately, the probate process can be lengthy. The whole affair could take as few as five months, but standard cases generally take nine months to a year, and even longer for contested cases. And the family/beneficiaries of the item in probate must pay any legal fees, taxes, and extraneous fees associated with it before receiving the assets. Assets in a trust could be distributed in as little as a few weeks, all while avoiding expensive fees and taxes.
If an individual owns assets in multiple states but does not put them in a trust, those assets are subject to the unique probate law of each state. So, the beneficiaries would have to navigate multiple probate courts to receive the assets. Titling your assets in a trust avoids the extensive probate process and accompanying fees in multiple states.
The probate process is public, meaning that anyone can see your estate and assets. Since trusts are not subject to probate, your estate remains a private matter. The contents of your trust are known only to your beneficiaries after your death.
Putting your assets in an irrevocable trust means that they are protected from creditors and steer clear of estate taxes. Assets in an irrevocable trust may not be seized by creditors and are not subject to estate taxes, which is beneficial as assets appreciate.
A living revocable trust protects your assets from conservatorship if you become incapacitated. A conservatorship happens when the court appoints a guardian to manage the incapacitated individual’s finances. But a successor trustee (like the spouse of the trustor) chosen by the trustor can manage the finances and assets in a revocable living trust —unlike a guardian appointed by a judge—who steps up as the trustee if the trustor is incapacitated.
While there are many benefits to putting your home in a trust, there are also a few disadvantages. For one, establishing a trust is time-consuming and can be expensive. The person establishing the trust must file additional legal paperwork and pay corresponding legal fees.
While accurate record-keeping can be a challenge, trusts are more complex so keeping up-to-date records is paramount, particularly for tax purposes. Taxes are relatively straightforward for a living trust if you are both grantor and trustee. On the other hand, moving assets in or out of the trust requires additional records. It can be easy to forget about recordkeeping if it’s been some time since you established the trust. After establishing a trust, you should regularly revisit your trust to ensure it is accurate and best serves your needs. Trustees are also obligated to account to the beneficiaries on a regular basis for the managed assets.
As alluded to earlier, in the case of a revocable trust, the assets in it are not removed from your taxable estate at the time of your passing. This is because in a revocable trust you still maintain ownership over the items in it. So your beneficiaries may still have to pay estate taxes on the assets in your revocable trust after your death.
And for the same reason that your estate is still taxable, assets in a revocable trust may also be seized by creditors. If this happens, the trust could be dissolved to compensate the creditor.
While there are a few cons to putting your home in a trust, the benefits may outweigh the drawbacks. Even though it can be costly and somewhat time-consuming on the front end, a trust ensures that your assets are distributed as you see fit to best benefit your family, without the lengthy public probate process and additional fees and taxes.
Give us a call today if you are wondering if establishing a trust is the right estate planning move for you.