Living Trust Pros And Cons
Do I Need A Living Trust?

mo johnson living trust pros and cons authorBy Mo Johnson

People often ask me whether they need a living trust or not. Of course the answer depends on you. There are advantages and disadvantages to living trusts that must be applied to your situation before you can make an intelligent decision.

So, let's start with the advantages.

  1. A living trust can help your estate avoid probate. This is a big advantage especially if your estate is large. Probate can be expensive and lengthy with larger estates. It can be difficult even in small estates if the probate is contested or involves complicated assets (i.e. a family business). Unlike a normal will, a living trust does not have to be probated. Upon your death, the assets in the living trust are held or transferred by your trustee according to the terms of the trust. Thus, they get distributed without going through probate.
  2. A living trust can keep your affairs private. When a will is probated it becomes part of the public record. Anyone can read it. Living trusts generally remain private. Not only is this nice if you don't want everyone knowing who you left what to; but also the privacy of the living trust lessens the likelihood of litigation.
  3. A living trust offer flexibility. You can easily change a living trust during your life as circumstances warrant. Changing a will requires more formality and following certain procedures to make a change. Usually, the entire will has to be rewritten.
  4. A living trust can be used to avoid guardianship proceedings. If you become disabled, your trustee can manage your assets and financial affairs for you while you are disabled. Without a living trust, your loved ones would have to initiate guardianship proceedings in court and get a judge to give them the ability to act for you.

How about the disadvantages?

  • Must be properly funded. A living trust is useless unless your assets are formally transferred to the trust. So, all the advantages above disappear if you have not funded the trust. Getting your assets transferred to the living trust takes time and usually there is at least some expense. Also, particularly with real estate, it can be difficult to do certain things with the property (like get a new mortgage) when it is held in a trust.
  • Cost. In addition to the costs of funding the living trust, there is also the initial cost to have an attorney prepare it. Generally it will cost more to have an attorney prepare a living trust than it would to have the attorney prepare a simple will.

  • The Tax Myth

    People often say that having a living trust will save your heirs estate taxes. This simply is not true. It is true that a living trust can be used to save estate taxes; but, so can the usual testamentary trust that most wills contain.

    The issue only arises for estates that have assets in excess of the estate tax exclusion. In 2008, the estate tax exclusion is $2 million in the U.S. That means that estates with a value of $2 million or less owe no federal estate tax. In 2009, the exclusion will rise to $3.5 million. The estate tax is slated to go away all together for one year (2010). But, after that it goes back down to $1 million. Nuts!

    For estate planning purposes, you should assume a $1 million estate tax exclusion [unless you can be certain of your death in 2010.] So, if you have over $1 million in assets, you need to worry about the estate tax. One common strategy is to put $1 million into a living trust or a testamentary trust (established by a will) that passes eventually to your children or someone else. You let the rest of your assets go to your spouse upon your death (untaxed due to the unlimited marital estate tax exclusion) and then when they die they also get to use their $1 million estate tax exclusion. So, through this procedure, in the end, $2 million of marital property can avoid the estate tax.

    Passing $1,000,000 (or in 2008 $2 million) into a separate trust simply assures the first spouse who dies fully uses his or her estate tax exclusion. If he or she simply transferred everything to the other spouse, the deceased partner would have “wasted” their estate tax exclusion.

    But, all of that, just to make the point that taxes are really a red herring when it comes to living trusts. You can pay them or avoid them with or without a living trust. The living trust is simply one vehicle that can be used to maximize your estate tax exclusion.

    So, the answer to whether you should get a living trust or not is: “It Depends.” How's that for a lawyer's answer?

    You can read more about the pros and cons of living trusts at Advantages of a Living Trust and Disadvantages of a Living Trust. Mo Johnson is an estate planning attorney and publisher of Free Living Trust Information and Estate Planning Hub.