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A primer on living trusts - avoid probate and reduce estate tax

Question

A friend recently asked me if I have a living trust. I don't. What exactly is a living trust? What are the benefits of having one? And if I have a living trust, do I really need a will?

Marci A.
Almaden Valley

Dear Marci:

A living trust is an important tool in your overall estate planning toolbox. Living trusts are mainly used for helping people avoid probate and save money. Whether or not you should set up a living trust depends exactly on what you wish to accomplish. A living trust is usually the centerpiece of your estate plan.

For Almaden Valley homeowners, with real estate values such as they are here, I cannot imagine a case where it would not be good to have a living trust.

A living trust is an entity, something like a corporation, that can legally own property. A person must be in charge of the trust. This person is called the trustee. You can be the trustee of your own living trust to keep full control over all of the property owned by the trust. If you are married, your spouse may be a trustee also.

In the living trust you name the people or organizations you wish to receive the property after your death. You can typically change your choices and modify or revoke the trust at any time if you wish.

When you die, the person you named in the trust - the successor trustee - transfers ownership of the property to the people you want to get it. Usually the successor trustee can distribute the property in a few weeks.

A living trust helps you to avoid probate after your death. This means that your property won't have to go through probate court before it is distributed to your beneficiaries. Probate is a court supervised process of paying your debts and distributing your property to the people who receive it.

The average probate lasts 6-12 months (sometimes longer) before your beneficiaries get anything. And by that time, there's less for them to receive because a good chunk of the property must be used to pay for legal and court fees.

How does a living trust avoid probate? The property you transfer into a living trust before your death doesn't go through probate. The successor trustee - the person you appointed to handle the trust after your death - simply transfers ownership to the beneficiaries you named in your trust. In most cases, the whole process takes only a few weeks and there are no lawyer or court fees to pay. The living trust terminates when all of the property has been transferred to the beneficiaries.

What are the benefits of a living trust? Living trusts can do more than help you to avoid probate. Most living trusts also help you reduce estate taxes. (For people who die in 2000 and 2001, $675,000 is excluded from federal estate tax - double that for a married couple, if done right.) Unlike a will, which becomes a matter of public record when it is submitted to a probate court, the terms of a living trust can remain confidential so your privacy is protected.

If I have a living trust, do I need a will? Absolutely. A will is an essential back-up tool for property that isn't transferred to your living trust.

As you can see, Marci, a living trust is a great tool for avoiding probate and ensuring that your property is distributed according to your wishes. A living trust can be very useful in helping you to reduce your estate taxes - often down to zero. When you prepare or update your living trust it's always best to consult an attorney to make sure that your wishes are properly met.

Marci, you can also refer to two other articles I wrote about living trusts: "Eight reasons to update your living trust and will" and "Living trust concept presents questions." You can read them right here on my website.