Are Living Trusts Worth The Money?

Written by Brian Tillotson and Karen Spence

The most common estate planning question we get at Virtus Wealth Management is regarding living trusts. Couples are bombarded with ads telling them they need a living trust.  Like most every topic in wealth management, including annuities and whole life insurance, there are positives and negatives to getting a living trust.  Karen and I are going to tackle living trusts today in a point-counterpoint discussion.

Before we start, the most important point to be made here is a plan is better than no plan.  A living trust can be determinantal but less so than the risk of having no estate plan at all.  To be frank, there is no excuse to not have some form of an estate plan, especially if you have minor children.  Wills are cheap and easy.  With that said, let’s get back to living trusts:

Brian – The Pros of Living Trusts

Living trusts are absolutely not for everyone.  They are absolutely sold to people who don’t really need them and do not understand the probate process.  However, they can be a very effective tool for the right situation.

There are 5 main reasons some lawyers propose living trusts to people.

• Estate taxes
• Probate
• Control
• Privacy
• Asset protection

Under the current tax code, the estate and gift tax exclusion is $11.7 million per person and $23.4 million per couple.   If you don’t have that much money then a living trust does not benefit you from an estate tax perspective.  It is important to note that this exclusion can change.  We have a new administration and a rising federal deficit.  Taxes are more than likely going to increase, and estate exemptions are an easy target.  Even though it is $11.7 million per person now, the estate and gift tax exclusion could be a lot lower in the future.  I am not suggesting anyone run out and get a living trust today because estate exclusions might drop in the future.  Rather, it is something that needs to be monitored.

As for probate, it depends on which state you reside OR have property in.  An easy research can show you the cost of probate in your state.    Please note, you have to go through probate in each state you own property, not just where you live.

Control is important for some.  Wills are the easiest and least expensive estate plan.  For those that want to control the money after they pass away, wills do not help.  Wills are executed after a person’s death but end once they are executed.  If one leaves money to an adult child, then that child can do whatever they want with that money.  This is the main reason people with an adult child who has a situation which you might not want them to come into a lot of money, i.e. an addiction, use a trust.  A trust can be used to help in that situation because it can be used to control your assets after death.  Assets should not be left to minor children directly.

Some people prioritize privacy in their lives.  Whether you have a will or no plan at all, the state courts have to “approve” a plan to distribute the estate, called probate.  This is typically a mere formality unless it is contested.  Even in the common “mere formality” situations, the proceedings are public.   A living trust avoids probate, thus are not available to the public.

Finally, for the pros, trusts are a very good tool for asset protection, including against creditors.  There is an important distinction here though.  Only irrevocable trusts are protected against creditors.  Irrevocable just means once you sign the trust, it can’t be changed.  Living trusts are typically revocable until you die then become irrevocable upon execution.

Karen – The Cons of Living Trusts

As you can see, Brian listed some of the Pros for Living Trusts, but also imbedded the Cons in that discussion as well.  I re-summarized below.

• Estate Taxes – Yes, but do you really need Estate tax protection? The estate tax exemption is $11.7 million per person right now.  Even if it drops to half that, are you affected?
• Probate – Yes, but do you really need to avoid probate? What are the probate costs in your state?  Is probate a mere formality for you?  Can you use “transfer on death” registrations instead?
• Control– Yes, but do you need to control you assets after death? If so, this is a good reason for a Living Trust.  That said, the assets have to be titled in the name of the Trust to be included in the Trust and thus controlled after death.  This is not just a one-time thing.  Trusts require continuous maintenance to be effective.
• Privacy– Yes, but do you need privacy after death? As Brian states, probate is a mere formality unless it is contested.  Proceedings are public, but they are not exactly easy to find.  You can also maintain privacy by using “transfer on death” registrations if available in your state.
• Asset Protection – Assets are only protected for irrevocable trusts which are trusts that cannot be changed once they are signed into place. Living trusts are typically revocable until you die (so assets are not protected from creditors) then become irrevocable upon execution.

Living trusts are complicated, intricate, and require continuous maintenance and record keeping.  It is a serious decision that requires serious thought.  You may be able to reach your goals using other methods and those need to be considered as well.

I agree with Brian.Living trusts are absolutely not for everyone, but they can be a very effective tool for the right situation.   We are here to discuss the options and help you determine what’s best for you!

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.