Putting your assets, including your home, into a trust will streamline the inheritance process for your heirs. Assets in a trust do not have to go through probate, a process that can be lengthy in today’s crowded court system. Should you put your home into a trust, as increasing numbers of people are doing? Here are the pros and cons of using trusts in estate planning.
What is a trust?
A trust is a legal entity into which a person can transfer assets. Real estate, tangible goods such as art, and financial assets such as investments and bank accounts can all be placed in trust.
The person who sets up the trust and puts assets into it is known as the grantor. This person names themselves or a third party as trustee to manage the trust assets. The grantor also names:
- A backup trustee in case the primary trustee becomes incapacitated.
- Beneficiaries to whom the trust assets will pass when the grantor dies.
- Backup beneficiaries are those whose assets will pass if a beneficiary dies before the grantor.
A primary advantage of transferring assets to a trust is that beneficiaries can inherit them without going through probate. Probate is the court-administered legal process in which a person’s estate is settled in accordance with the terms of their will. Probate can be lengthy and expensive, leaving heirs languishing.
Types of trusts
You can use either a revocable or irrevocable trust to streamline your estate planning.
With a revocable trust, the grantor can change beneficiaries or amend the trust’s terms. The trust can also be dissolved while the grantor is still living. In addition to bypassing probate, the advantages of a revocable trust are its flexibility and the privacy it allows (probate creates public records). The disadvantage of a revocable trust is that the grantor still owns the assets and thus must still pay taxes and expenses on them. The grantor receives no protection from creditors and no tax advantages.
An irrevocable trust is one the grantor can change only in very limited circumstances, making it a less flexible estate planning tool. The grantor names a third party as a trustee to manage the trust. Once the grantor transfers assets to the trust, he no longer owns them.
In addition to bypassing probate and offering privacy, irrevocable trusts protect assets from creditors and help lower the size of the grantor’s taxable estate, reducing the tax bill. The disadvantage of irrevocable trusts is their lack of flexibility. Changes must be agreed to by all beneficiaries or approved by a court. Also, assets become the trust’s property; the grantor can no longer control them. Finally, irrevocable trusts can be complex, which means you’ll likely need to spend money consulting with an attorney over time.
How do you decide which trust to use?
There is no simple formula to decide which, if any, trust to use. Consult an estate and tax attorney to determine what’s in your best interests.
Related – Comparing Wills and Trusts: Which Do You Need?
