The crux of their pitch is that if we put our property in a closed trust with our children, the property would not be subjected to probate upon our deaths. And by so doing, we are told, we eliminate probate fees and lawyer costs.
Is this true?
Answer: Living trusts are often marketed through "free seminars" or high-pressure sales pitches. Many people do not understand what they are getting and may not even need a trust in the first place. It all depends on your individual needs and desires.
A living trust is a legal arrangement in which all assets owned by an individual are transferred into a trust that is managed by a trustee for the benefit of the individual. The trustee is usually the original owner of the property, with successor trustees named to take over upon the original trustee's death or incapacity.
The most common sales pitch is that a living trust allows you to "avoid probate." The term "probate" is tossed around as if it were some kind of disease to be avoided at all costs.
In some states, probate can be cumbersome with significant mandatory fees and attorney costs. But in Washington, the probate process is fairly streamlined, and there are no mandatory fees. In other words, it's not really that bad. So if avoiding probate is your only reason for entering into a living trust, you might want to reconsider.
When you set up a living trust, you are essentially paying your probate costs up front while you are still alive. You will have to pay fees for drawing up the legal documents, as well as paying for the transfer of title to your property.
In addition to the set-up costs, your living trust must be updated periodically. For example, if you set up a living trust this year and bought a summer cabin in the mountains next summer and forgot to add it to the trust, your estate would have to go through probate upon your death because you owned an asset outside the trust.
To avoid that problem, some people routinely update their living trust at the end of each year by transferring all major assets acquired during that year into the trust.
Living trusts make it easier for your heirs upon your passing because all of the property transfers have already taken place and there is no confusion over who is to get what. In essence, you are acting as the executor of your own will. This is especially useful for parents with complicated finances who are concerned that their children would not be capable of dealing with the complexities of their estate.
Another advantage of living trusts is that they allow you to avoid probate in states where the costs are much higher than they are here in Washington. For example, California has mandatory fees and attorney costs associated with its probate process.
If you are a resident of Washington, everything you own in this state would be handled under Washington's probate procedures. But if you owned a vacation home in Palm Springs, that home would have to go through probate in California. That's why some people place all of their out-of-state property in a living trust, but leave everything else in their own name.
One of the best uses of a living trust is a situation where the property owner thinks he or she may become incapacitated at some point during their life. A living trust allows that person to manage his or her own affairs as long as they are capable.
Control of the trust then passes to a predesignated successor trustee when certain criteria are met in regards to the mental competency of the original trustee.
One disadvantage of a living trust is that it may be more difficult to get a mortgage on a property in a trust. However, many mortgage lenders have recently changed their policies and now allow mortgages to be taken out in the name of a trust as long as it meets certain legal requirements.
A living trust is not the "magic bullet" that some promoters claim. It won't save any taxes and it may or may not keep your estate out of probate. But living trusts can be useful in certain circumstances.
Consult a financial planner or tax adviser before entering into a trust. Also, be aware that some of the pre-packaged living trust forms sold by promoters passing through town may not meet the legal requirements for this state. Seek legal advice before signing and recording any trust documents.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at email@example.com.