To most young parents, a will or living trust is one of the last things that crosses your minds. However, a living trust is one of the most important legal documents you could possibly invest in, especially if you own any real estate or investments.
Most parents would agree that they wouldn’t drive with their kids in a car without insurance. Banks won’t offer a mortgage if you don’t have home owner’s insurance. So why is it that roughly 60% of Americans don’t have a will or living trust? A living trust is like insurance on your assets for your children. The problem, unfortunately, boils down to a lack of awareness of its importance, and an unwillingness to think about death. Yes, I said it – DEATH. You’ll need to be comfortable with the concept of your own death for the remainder of this article.
Why is a Living Trust Important?
If you have children and own a home or real estate, the importance of a living trust can’t be understated. A living trust is a legal mechanism that puts your most valuable assets into trust that you can access while you’re alive, but pass seamlessly to your children after your death. You have all the legal rights, responsibilities and tax obligations of the assets while you’re alive, and you can sell them or add to the trust as circumstances and assets change. Essentially what you’re doing is setting up a legal entity that temporarily (your lifetime) holds the assets.
Here’s the important part. When you die, the assets then automatically legally transfer to a beneficiary (or beneficiaries), who are designated in the living trust. The beneficiaries then have full legal rights to this assets without the need to go through probate… more on probate in a minute.
How Do I Put a House Into a Trust?
The process of putting real property into a trust is called “funding”. This is typically done through changing the title on real property to be recorded with the county in the name of the living trust, rather than you personally. This is a critical part of developing an estate plan that’s often overlooked or forgotten about. If you go through the trouble of setting up a living trust as part of an estate plan, and you don’t fund it you heirs won’t avoid probate and the beneficiaries (typically your spouse or children), will face a long, expensive probate process.
Why do You Want to Avoid Probate?
Probate is the necessary legal process of distributing a deceased persons estate (or property) to the proper heirs, while ensuring any legitimate creditors are paid off. This process, as it turns out, can cost your heirs thousands of dollars, and take years to complete – even when it’s a “clean” probate (uncontested). The current allowable fees for probate in California, for example are 4% on the first $100,000, 3% on the next $100,000, 2% on the next $800,000, 1% on the next $9,000,000 and… well if you have to go beyond that you probably already have an estate plan figured out.
The bottom line is that you want to preserve every dollar you can for your heirs, and the only way to do that is to make sure they don’t have to go through probate.
I’m Young, I Don’t Need a Living Trust
You’re wrong. That should be the end of the argument. Still need convincing? There are many scenarios as to why you need it and to address those possible incidents would get depressing and gruesome. However, you need to understand that the living trust is just one part of a comprehensive estate plan. Typically, nobody plans when they’re going to die, but if a catastrophic accident occurs or you and your spouse become incapacitated you need the peace of mind that there’s a plan in place for your children.
Other parts of an estate plan can contain documents like a will, durable power of attorney, healthcare power of attorney, business succession, guardianship designations for minor children… if you don’t know what any of this is you need to speak to an estate planning attorney.
How Much is an Estate Plan?
Common estate plans, which typically include a living trust, for most people typically range from $2,500 – $5,000, depending on the size of the estate and the protections involved. There are websites that can help you for as little as a couple hundred dollars, but most experts are still very cautious about using those services. In my opinion, if you own a home you shouldn’t trust it to be passed to your children properly using a website or software. Estates that have significant assets and protections can easily cost $15,000 – $20,000 (or more), and they’re often worth the investment for those that need it.
The best advice we can offer is to consult with a professional to explore your wants & needs, and get your questions answered. Doing this process sooner rather than later might be uncomfortable, but after it’s done the peace of mind is invaluable.
I believe that financial education is very important for your entire family. The more knowledgeable you are, the better you understand financial matters, the less chance you have of getting hooked by scammers and the more chance you have of raising capital