You may have heard of a living trust that is created while you are still alive. It can be set up as a revocable trust, permitting you to change the terms of the trust or dissolve it entirely should circumstances change.
Such a trust can take the title to your home and transfer the control of the property to a trustee. When you die, the trust becomes an irrevocable trust, prohibiting future changes to the terms.
Two Advantages to Placing Your Home in a Trust
Avoiding probate – Most living trusts are structured to avoid probate and its costs. Some states have streamlined the probate process, but it still requires costs, time, and attendance at multiple hearings. If you wish to avoid probate and transfer the title to your home to your heirs, thereby avoiding probate, a trust is a strong advantage. Should you choose to transfer other properties, some of which are out of state, you can avoid probate in other jurisdictions too.
Future Incapacity Protection – Should you become ill and unable to properly manage your own finances, another trustee can be selected to manage your trust to protect your home. Living revocable trusts give you this benefit. If you have a co-trustee who is your spouse, this further simplifies and protects your home. Your spouse can remain as trustee, managing your home and other assets you have transferred to the trust.
Contrary to popular belief, trusts like these generally do not protect against the estate tax, but since there is such a high floor, relatively few estates are subject to the federal estate tax.
Regardless of your situation, such a trust should not be entered into lightly. You should know these key factors before signing on the dotted line:
(1) The complexity of designing a trust as compared with a simplified will can accelerate the costs to use this method of protection. Should you wish to shelter more than just your home, you will need to be diligent and transfer other assets to the trust as you acquire them and remove those you no longer own. All this attention can add legal costs to maintaining the trust. This does not mean you should not do it, but you should be aware of the costs.
(2) Other assets may be subject to probate, meaning even modest bank or investment accounts must go through the probate process. Then, after you die, your estate may face more expenses—the trust must file tax returns and value assets, which potentially may negate the cost savings of avoiding probate.
(3) Do not count on a revocable living trust to automatically protect your home from creditors. There are other ways of protecting your house from creditors that should be discussed with a financial professional.
(4) A little-known major living trust benefit comes into play if the trustor becomes incompetent. Then, the alternate trustee takes over management of trust assets without court costs and delays of appointing a conservator.
(5) A trust is usually easy to change. Trust terms can be changed or revoked, until the trustor dies, when they become irrevocable. This prevents a surviving spouse from disinheriting a beneficiary named in the living trust, maybe a child from the deceased spouse’s first marriage.