“Setting up a living trust will save money for your heirs by avoiding probate.” Reader’s Digest
Yes, the main reason for putting your house in a trust is saving your family the trouble of going through probate. Probate can cost your loved ones up to 5% of the property value and take months (or even years) to complete.
What are the different types of trust? How do they work? What are other reasons to take care of your assets this way? Let’s take a closer look.
Two Main Types of Trusts
A trust is a legal document created while a person is alive to take care of the assets after his or her death. When these assets become part of the trust, they belong to the trust itself.
Let’s veer off course a little to define some important trust-related terms.
- Grantor (or Trustor) – a person who sets up and funds the trust by putting assets into it.
- Trustee – a person responsible for managing assets while they are in the trust. If the trustee and the grantor are the same person, successor trustees are named to take up the responsibilities after the grantor’s death.
- Beneficiary – people who end up receiving the assets in the trust after the grantor’s death.
Even though dozens of different trusts exist, the main types are:
1. Revocable Trust
Grantors create revocable trusts during their lifetime. Such trusts can be modified or terminated (revoked) according to the trustor’s wishes.
The grantor of such a trust is usually also the trustee and the beneficiary. They manage their own assets during the lifetime but hand over the rights to successor trustees and other beneficiaries upon death.
When grantors transfer the assets to revocable trusts, they don’t become subject to probate upon their death.
Usually, a revocable trust turns into an irrevocable trust after the grantor passes away.
2. Irrevocable Trust
We’ve all heard stories about wealthy individuals who have managed to pay little or no taxes, even when they die. How do they do it? In most cases, through trusts.
The grantor can’t change or terminate the irrevocable trust during the lifetime. It cannot be revoked after the grantor’s death either.
According to a real estate lawyer from Orlando, since assets can’t become the grantor’s possession during the lifetime, irrevocable trusts are usually more tax-efficient. That’s why irrevocable trusts are rather popular even though they are much less flexible than their revocable counterparts are.
Differences Between a Will and a Trust
What if you already have a will? Isn’t it enough to divide your house according to your wishes? The key difference between the two documents are:
- The will goes into effect after the person’s death. A living trust goes into effect after it’s signed.
- The will requires probate. The trust doesn’t.
“Unlike in a will, assets in a living trust will generally pass to heirs sooner. In many states — though not all — the process by which a will is probated through the courts is lengthy and expensive,” says the author of “Probate Wars of the Rich and Famous”, Russell Fishkind.
Creating a will is definitely better than not planning for the division of your assets at all. Creating a living trust is the next responsible step.
4 Important Benefits of Putting Your House in a Trust
Statistics say that only 42% of U.S. adults have estate planning documents, such as wills or living trusts. The main reason is the inability to think about death. Meanwhile, besides saving loved ones a lot of trouble, putting your house in a trust can have numerous other benefits.
1. Protecting Beneficiaries
Minimizing the time and money your beneficiaries spend on obtaining your property is just one part of protecting them. By arranging a trust, you can also ensure the house doesn’t fall into the wrong hands (e.g. your child’s ex-spouse).
If the trust is drafted properly, it provides divorce protection to the beneficiaries.
Let’s say your child is in a bad marriage and you don’t want the spouse to have rights to your assets. You can structure the living trust so assets stay in the trust after your death. The child will have control of the assets, enjoying the inheritance without actually owning the house. Accordingly, in case of a divorce, the spouse can’t claim the property.
2. Planning for Incapacitation
While people usually want to avoid contemplating death, they think about incapacitation even less. Meanwhile, many problems with real estate arise when the owner isn’t capable of making decisions due to mental incapacitation.
By setting up a revocable trust, you allow a successor trustee to take over in case you are incapacitated. You don’t have to worry about creating a power of attorney or arranging joint ownership rights with your beneficiaries. Meanwhile, revocable trusts usually have a great level of acceptance through the legal community.
3. Maintaining Privacy
Do you want everyone to know how you divide your house? If all you have is the last will and testament, expect its terms to become public knowledge. Anyone can go to probate court and study your asset management decisions.
Meanwhile, a living trust is a private agreement. It stays private after the grantor’s death, keeping beneficiaries from encountering unpleasant problems, such as overly nosy friends and neighbors.
- Having Peace of Mind about Not-Yet-Mature Children
Having children fighting over property isn’t something any parent wants to happen. Meanwhile, the intended beneficiaries often don’t have the wits or capacity to handle the sudden inheritance.
For example, upon your unexpected death, your children may still be in high school or college. Getting the entire house (or several of them) may usually be too much for them to handle. A 19-year old kid is likely to sell it for a less-than-fair price and use the cash for not-so-mature needs.
To avoid rash decisions on the part of your child, you can create a trust with a reliable person as a trustee and explicit instructions of what to do with the property until the kid turns, say, 25 or 30.
The Bottom Line
Setting up a living trust is a smart and responsible step. By doing that, you don’t just protect your loved ones and assets, you are giving yourself an invaluable peace of mind.