Everyone needs a lawful way to pass assets to their heirs after they're gone, and either a will or a revocable living trust can do the job. Living trusts are popular because, unlike wills, they avoid probate, which takes time and costs money. But living trusts are a bit like the gadgets that pitchmen hype on infomercials—you might find them useful but you'll be disappointed if you expect miracles.
On the plus side, the successor trustee that you name if you create a trust should be able to quickly distribute your trust's assets to heirs, often in just a few weeks. Probate, by contrast, can drag on for six months to a year. The process varies by state but it usually entails submitting the will and an inventory of the estate's assets to a probate court, paying all creditors, and then distributing what's left to heirs.
Your survivors could also end up with more money if you create a living trust. Probate costs vary and sometimes depend on the size of your estate. In about half of the states, courts charge an initial filing fee of $40 to $200. In other states, the fee depends on the value of the assets that pass through probate. In Manhattan, for example, Surrogate's Court fees range from $45 for estates worth less than $10,000 to $1,250 for those worth $500,000 or more. If you hire a lawyer to fill out and file the required probate forms, he or she might bill $150 an hour or more, or charge a flat fee, typically a few thousand dollars.
A living trust can also come in handy during your lifetime. Since the trust is revocable, you retain control over the property you place in it and can change its provisions and even serve as trustee. If you become ill, your successor trustee can manage the assets.
On the downside, it's generally more expensive and time consuming to set up a living trust than to write a will. Lawyers typically charge $1,200 to $2,500 for a living trust vs. several hundred dollars for a simple will, although fees vary depending on where you live and the value and complexity of your estate. Moreover, there are simpler and even free ways to avoid probate. For example, your share of jointly owned property or assets that have designated beneficiaries, such as IRAs, life insurance policies, U.S. Savings Bonds, and payable-on-death bank accounts don't have to go through probate. Finally, a living trust won't help you avoid estate taxes. If you are wealthy enough to worry about estate taxes, see the box below.
If you decide to create a revocable living trust after weighing the pros and cons, you should follow these steps to spare your successor trustee from hassles:
"A lot of people mess that up," says Mary Randolph, an attorney and author of "8 Ways to Avoid Probate" (Nolo, 2010). "They don't get around to doing the transfers, and then their successor trustee has to do both—go through probate and settle the trust." Unless you own an asset jointly or it has a designated beneficiary, like an IRA, property that you fail to place in your living trust must go through probate.
To place assets in your revocable living trust, you must re-title them in your name as trustee. Say you want to hold your house in your living trust. You would have to sign a new deed that transfers the property to "Jane Doe, trustee of the Jane Doe Revocable Living Trust, dated Oct. 1, 2011." Don't expect the lawyer who draws up your trust to re-title your assets for you.
To save time and effort, contact the financial institutions where you have accounts and ask them how to proceed. Some might insist that you use their own forms or require that you have your signature notarized or guaranteed by a bank, credit union, or broker that participates in a Medallion signature guarantee program.
You should also attach a schedule to your trust document listing the assets you have transferred to your trust. Make sure your successor trustee knows where to find the deeds, bank and brokerage statements, and other documents that prove your revocable living trust owns the assets.
You need one even if you have a living trust. If you have minor children, you need one to name a guardian for them. In addition, you can include a so-called pour-over clause in your will that says that any assets you didn't transfer to your living trust should go there after your death. They might have to go through probate first, depending on their value and your state's laws. But most states permit small estates to bypass probate or use a simplified procedure.
A living trust is useful if you become ill because your successor trustee can take over as its manager. But he or she has authority only over the assets in your living trust. Therefore, you also need to create a durable power of attorney so that your successor trustee or another agent you name can deal with insurance, tax, and other financial issues for you.
If you have an account at every bank in town, the person who settles your estate will have a tedious job whether you use a living trust or a will. In either case, she will have to show a long list of bankers a certified copy of your death certificate, proof that she has the authority to settle your estate, and identification, such as a driver's license or passport.
If you write a will, your successor trustee will have to obtain documents from the probate court that give him or her the authority to act. If you use a living trust, your successor trustee will have to present either your trust document or a notarized affidavit of assumption of duties. There is no legally required format for the affidavit, but it should include the name of your living trust and the date you signed it, the fact that you named a successor trustee in it, and the date of your death.
Finally, keep the original copy of your trust in a safe place, like a fireproof box at home, that you tell your successor trustee about. After all, he or she shouldn't have to tear your house apart looking for a document that's supposed to make settling your estate easier.
A revocable living trust doesn't protect you from estate tax. That's because you retain control over assets in such a trust during your lifetime. If your estate is large, an attorney might suggest you create other types of trusts that can help you avoid or at least minimize estate taxes.
Few people have to fret about federal estate tax right now, but that could change soon. For 2011, the federal estate-tax exemption is $5 million per person or $10 million per married couple. If Congress doesn't act, the estate-tax exemption will drop to $1 million per person or $2 million per married couple in 2013.
Even if your estate isn't large enough to incur federal tax, your state's tax collector might take a cut. Sixteen states (Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Washington) and the District of Columbia impose their own estate taxes. Earlier this year, however, Ohio eliminated its estate tax starting in 2013.
This article appeared in Consumer Reports Money Adviser.