Why Setting Up a Living Trust May Be Unnecessary

Living trusts are a great way to leave property for your loved ones without going through probate.

Probate refers to the process in which the probate court distributes the decedent's property. Typically, the property goes to family members, loved ones, and heirs after the decedent's death.

The probate process can be lengthy and expensive, especially with larger estates. There are many ways, however, to avoid probate. Effective estate planning can help you achieve your objectives.

Certain assets can avoid probate. These assets include:

• Pay-on-death bank accounts
• Real property owned as a joint tenancy with rights of survivorship
• Life insurance policies with a non-estate beneficiary designation
• Naming beneficiaries on your retirement accounts and annuities

All of these are limited to certain types of property.

Gifting to Reduce Value of Taxable Estate

Planned giving can also simplify probate and reduce gift and estate tax liability. As of 2023, the federal estate tax exemption is $12.92 million.

As of 2023, the annual exclusion amount for gifts is $17,000 per recipient per year. Thus, you may make unlimited $17,000 gifts annually without incurring a taxable gift. These gifts are tax-free to the grantor and the recipient. Gifts exceeding $17,000 per year are subject to the gift tax. Lifetime gifting can reduce the assets that you will own at death.

Living Trusts

A living trust is an estate planning tool that allows you to avoid probate in certain instances. A trust can be used to distribute property after your death. You can transfer property using a trust without creating a public record.

Your trust could hold property for minor children, loved ones with special needs, other family members, or charitable organizations.

To create a trust, the property owner (or “grantor" or “settlor") transfers legal ownership of the property to a trustee. They manage the property for the benefit of the beneficiaries. You can name a corporate trustee, co-trustees, a family member, or yourself as trustee.

When you create a revocable living trust agreement during your lifetime, you can transfer assets to the trust. Assets you transfer to the trust become trust assets.

You can gift nearly all the property you own to trusts. And you can even set up a trust yourself using an attorney-approved form.

Is a Living Trust Necessary for Your Estate Plan?

A living trust may not be necessary in your case. It can depend on your age, the size of your estate, and your marital status. As beneficial as a living trust can be, they have drawbacks.

Some of the drawbacks compared to a last will and testament include:

• Increased time to set up a living trust
• Additional upkeep and maintenance compared to a simple will
• A trust is more difficult to modify than a will
• A trustee or successor trustee's duties can span a decade or more

It is best to seek legal advice from an estate planning attorney before setting up a living trust. Attorney fees for legal assistance for setting up the legal document and funding the trust can cost several thousand dollars.

The benefits of a living trust can still outweigh the drawbacks, however, if setting up a living trust is right for your situation.

Consider the following factors and decide whether to set up a living trust.

Age

The cost and time to set up a living trust may not be suitable for you if you are under 55 and relatively healthy. A living trust often serves you no benefit during your lifetime.

A young, healthy person will probably not have to worry about probate costs for years. Until then, creating a will is easier in many regards. A simple will should suffice in transferring your property should something happen to you unexpectedly.

Furthermore, various estate planning tools to avoid probate are becoming more accepted. As you get older, these techniques likely will become even more common.

Size of Your Estate

The larger your estate, the more assets you have that may need to go through probate. Therefore, the wealthier you are, the more you can save by avoiding probate. The types of assets also make a difference.

Creating a living trust might be sensible if you own an asset like a business. For example, a business may suffer harm if encumbered in probate proceedings. Even if you are young, you should avoid having your business interests tied up in probate court.

Marital Status

Married couples with joint ownership interests are usually less interested in setting up a living trust. This is especially true if you jointly own significant assets, such as real estate. Probate is unnecessary for those types of assets.

Most probate procedures result in an expedited process for surviving spouses. This makes the probate process cheaper and more cost-effective.

Pour-Over Will

A pour-over will is a type of will that "pours" all of the testator's remaining assets into a trust set up before their death. The pour-over will ensures that the assets are transferred to the trust and then distributed to the trust's beneficiaries.

Like a traditional last will and testament, a pour-over will must go through the probate process. This can be a significant disadvantage if you seek to structure your estate to avoid probate.

Even after setting up a living trust, you still should create a last will and testament as a backup.

Not Sure If You Should Set Up a Living Trust? Talk to an Attorney

There are numerous reasons to set up a living trust. Talking with an experienced trust attorney will help determine if a living trust is right for your situation. You can also get started on your own with our state-specific, easy-to-use forms.