A revocable living trust is similar to a will in several ways. You can transfer property to your beneficiaries after death through a living trust. You can also name alternate beneficiaries in a living trust in the event your primary beneficiaries predecease you.

Unlike a will, however, assets in a living trust bypass the probate process and generally pass to your beneficiaries without delay. Living trusts can be a valuable part of an estate plan, but living trusts are not for everyone. So get all the details and consider your specific needs and the alternatives before establishing one.

The advantages

If you have significant assets, a revocable living trust can be an efficient way to transfer property to your beneficiaries. For instance, if your estate is large enough to be subject to estate taxes you can create a tax-saving trust within a revocable living trust, which becomes operational after death.

Additionally, if you own considerable real estate in another state, holding it in a living trust avoids a separate out-of-state probate proceeding. Likewise, if you own a business in a volatile market or if you own the types of assets that you don’t want tied up during the probate process, such as a small business, a living trust may offer rapid administration of your assets.

If you’re older or in ill health, a living trust can provide for the management of your trust assets without the need for court intervention or supervision in the event you become incapacitated.

Moreover, if you have a particular need for privacy, a living trust generally doesn’t have to be filed with a court in most states. This is in contrast to a will and other probate records that become public documents.

Note, however, that it is possible for a living trust to end up in court records. If a living trust is challenged, for example, the court may require that it be recorded in the public record. Similarly, if the trust is funded through a pour-over provision in your will, the property transferred from your probate estate may become public record.

Some common misconceptions

Unlike irrevocable trusts, revocable living trusts used by themselves don’t reduce income or estate taxes. A revocable living trust has to be created in combination with a so-called bypass/credit shelter trust to save on any taxes your estate may be subject to.

That’s because you retain control of a revocable living trust’s assets during your lifetime and because you can end this type of trust at any time. Consequently, all trust income is taxable to you and property in the trust at the time of your death is fully subject to estate taxes.

Furthermore, assets in a living trust aren’t shielded from creditors. Since you have power over property held in a living trust, creditors can attach living trust assets while you’re alive and in many states, after your death.

Similarly, property in a living trust can be subject to creditors’ claims for a much longer time, even after the property is transferred to your beneficiaries. That’s because assets in a living trust don’t go through probate administration, which in most states limits the period for notified creditors to file claims.

Another common misconception about living trusts relates to Medicaid eligibility. In fact, Medicaid counts property you hold in a living trust because you can take your property back at any time.

Do you need a living trust?

A living trust can be expensive to create, requires ongoing maintenance, and you still don’t avoid many of the costs associated with probate, including fees for preparation of documents, tax returns, and property transfers. What’s more, most states have streamlined and simplified the probate process, as well as created summary procedures for small estates.

So unless you have a large or complex estate or a special situation where a living trust would be beneficial, passing your assets through a will and using other probate-avoidance methods may be adequate for your needs.

Other ways to minimize probate include owning property jointly, naming beneficiaries on your life insurance policies and retirement accounts, and adding pay-on-death or transfer-on death designations to your savings and brokerage accounts.

And while a living trust can provide for the management of your trust assets in the event you become incapacitated, if you’re younger and in good health, a durable power of attorney for finances may adequately serve your needs. These inexpensive and easy-to-create documents, which you need even if you establish a living trust, allow you to authorize someone to act for you if you become unable to manage your own money.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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