Do I Need a Living Trust

Living Trust

I’m No Lawyer, But the Short Answer is….

Probably not.  For those who promote the use of living trusts, the general logic is that this is the single, best document that will help you avoid costly probate proceedings when passing assets to your heirs.  And while this technically may be true, in most cases there are easier, less expensive ways to avoid probate.  In addition, there are certain pitfalls associated with improperly managed trusts.  So, if you’re asking, “Do I need a living trust?” read on for many reasons why you probably don’t need one as well as a few situations when it actually does make sense.

Reason #1 – Jointly Owned Assets Pass Directly to the Survivor

Property that you jointly own with right of survivorship will automatically pass to the survivor upon your death.  So for example, no probate will be involved with major jointly owned assets like your primary residence.

Reason #2 – Assets with Named Beneficiaries Also Avoid Probate

Pensions, retirement accounts and life insurance policies offer you the opportunity to name a beneficiary.  As long as you take this important step, these kinds of accounts and assets will also avoid probate and pass directly to your named beneficiaries.

Reason #3 –  Bank Accounts Avoid Probate with a Payable on Death Designation

Your bank accounts can also easily be moved outside of the probate process by setting them up as payable-on-death accounts.  Designating them as such grants your designated heir immediate access to the accounts when you pass away.

Reason #4 – They are Expensive

Although this shouldn’t be a driver in your decision-making, it is a factor.  Many simple wills cost around $300 to put in place, while living trusts typically cost between $1,000-$3,000 to implement.  If all of your assets fall into the 3 categories listed above, in many cases it just doesn’t make sense to incur this extra expense.

Reason #5 – They Can Be an Unnecessary Hassle

When you set up a living trust, each asset that you want to shield from probate must be placed within it.  So, for example, if you have property that you want to put into the trust, you will need to record a new deed transferring ownership to the trust.  Again, no need to do this if it’s your primary residence that you own jointly with your spouse.

Reason #6 – Unintended Consequences

In certain situations, a living trust can actually complicate rather than simplify matters.  A living trust requires that you name both a trustee as well as either a joint or successor trustee.  Typically, you’ll name yourself as the trustee and many people opt to name a spouse as a successor trustee.

Let’s say this is the case for you and you become incapacitated and at the same time your spouse dementia.  In this scenario your children or other heirs will need to have your spouse declared mentally incompetent before gaining access to the trust assets.

Reason #7 – Living Trusts Don’t Help with Medicaid Eligibility

Contrary to some sources, living trusts do not make it easier to qualify for Medicaid.  Any assets you place into the trust are still “countable” for Medicaid eligibility purposes.

Some Situations that Living Trusts Do Make Sense

Despite all of the reasons listed above, there are some situations when it does make sense to put a living trust in place.  These include:

  • If you have significant out of state property holdings and want to avoid probate in that state.
  • If you own a small business and want to have the best chance of quickly passing along your business interests and minimize the chances of business disruption.
  • If you want to disinherit a child or leave more money to certain heirs as opposed to others, a living trust may be the way to go because they are harder to contest than a will.

Your Assignment

Here are some guidelines as you work your way through deciding which estate planning documents make sense for you:

  • Do make sure you have all beneficiaries properly named on all investment accounts and life insurance policies.
  • If you choose a will as your workhorse estate planning document, consider making all bank accounts payable-on-death.
  • If you do decide to move forward with a living trust, make sure to also have a will in place. This will help to mop up any assets you acquire later in life that do not make their way into the trust for whatever reason.
  • Another consideration for those of you who opt for a living trust. If both you and your spouse are older, consider naming an adult child or other trusted individual as successor trustee to avoid the unfortunate situation listed in Reason #6 above.

And most importantly, don’t take my word on any of this!  I am not a lawyer and none of this should be construed as legal advice.  Consider this as simply a starting off point for you to make your own estate planning decisions and a framework to guide decisions with your own estate planning attorney.

Originally published on Investopedia