Dear Rich Lifer,
‘There’s a myth that living trusts are only for the wealthy…’
That’s how the pitch starts.
Living trusts, formerly known as revocable trusts, are marketed as a way for people to avoid the hassles and costs of probate.
But what these slick salespeople won’t tell you about living trusts is what I’m going to share today.
Before we get too far along, let me start by saying that living trusts have their place.
No, you don’t need to be wealthy to benefit from a living trust. But, it’s still not a good enough reason to have one.
If you own out-of-state property or you plan on leaving one child more of your assets than the others, or you have assets that need ongoing management, a living trust can be a great estate planning tool you can utilize.
All too often, though, living trusts are sold to people who don’t fully understand what they’re buying.
Maybe they attended a free seminar held at a hotel conference center or public library, and they were sold on the benefits of a living trust. Then before they knew it, they were being pitched an offer that seemed too good to pass up.
The reality is what could have cost $300 to create a simple will, ended up costing $1,000 to $3,000 for a living trust this person really didn’t need.
Here are five things living-trust promoters are not telling you:
You Can Avoid Probate Without a Living Trust.
If avoiding probate is really one of your main sticking points to creating a living trust, then the good news is you can achieve this without overpaying for a trust. Most of your valuable assets can go directly to your heirs outside of probate.
Your house and other property that’s owned jointly with the right of survivorship goes directly to the joint owner when you die. Also, retirement accounts, pensions, and life insurance policies automatically transfer to the beneficiary.
If you’re worried about your family not getting immediate access to your money when you die, you can set up payable-on-death accounts. This gives recipients immediate access to your money.
There are also a few states that allow you to name a beneficiary for your car. And there are more than a dozen states that allow transfer-on-death deeds for real estate.
Probate Is Not as Bad as You Think.
Another way these salespeople will try to persuade you is by playing up how bad probate will be. The truth is a lot of states have streamlined the process for uncontested wills.
For example, in California if your estate is valued at up to $150,000, excluding property that passes directly to beneficiaries, you can avoid probate altogether.
The site nolo.com lists every state with exceptions and offers advice on how to avoid probate in your state. Keep in mind that there’s no probate for retirement accounts with named beneficiaries, joint accounts with survivorship rights, pay-on-death accounts and life insurance. If these make up most of your estate, a will should work just fine.
Lastly, sometimes probate can be worth it. Having a third party look over what the executor is doing, making sure all debts and taxes are paid, and assets found, can be beneficial.
You Have to Transfer All Property to a Trust.
If you want your house to be included in your trust, you need to record a new deed transferring ownership to the trust. This goes for all other assets, too.
New stock certificates must be issued. Cars and boats must be retitled. This can be a pain to do, but if you miss any one of these steps, the living trust is another worthless piece of paper.
Trusts Have Their Fair Share of Complications.
When you create a trust, you typically name yourself as trustee so you have control of the assets. Most married couples will name their spouse as joint or successor trustee.
This can create problems if your spouse becomes incapacitated or develops, say, dementia. Your family might have to declare that your successor or co-trustee is incompetent in order to gain access to your finances. A better approach is to name an adult child as trustee.
Also, a lot of people assume that if they transfer assets to a trust, they no longer are considered to be the owner of those assets since the trust owns the wealth. Therefore it’ll be easier to qualify for Medicaid.
Unfortunately, when you transfer your assets into a living trust, you usually still maintain substantial control over the trust assets. As a result, the assets will still count as resources when Medicaid eligibility is determined. Don’t believe anyone telling you living trusts will make it easier to qualify for Medicaid.
You Can Avoid Guardianship or Conservatorship Without a Living Trust.
Another major selling feature for living trusts is that they allow your family to avoid costly court-supervised guardianship or conservatorship, if you were to become disabled or incapacitated.
You can achieve the same thing with a durable power of attorney, which are a lot less expensive to set up and easier to use.
Finally, and not to dissuade you entirely from living trusts, but it’s important to understand that trusts are big business.
Most of the people selling you living trusts are good, honest people. But, some have ulterior motives. By getting to see what assets you own, these salespeople might try to sell you other financial products like annuities.
Bear that in mind next time you’re being pitched an “offer you can’t refuse” for a living trust.
To a richer life,