A living trust is an estate planning vehicle that protects your assets against taxes and probate after you die. There are multiple types of trusts, like marital, bypass, generation-skipping and more. You can generally assign beneficiaries and make adjustments, unless your trust is irrevocable. Depending on your personal situation, a living trust’s cost will vary. A financial advisor can help you create a strong estate plan.
What Is a Living Trust?
A living trust is an estate planning tool that allows you to protect and manage your assets during your lifetime. With a living trust, you can act as the trust’s trustee, or manager, and ultimately determine who will receive your assets after you’ve passed away. Another perk is that your assets won’t be subject to public exposure in the probate process following your death.
There are four primary types of trusts: living trusts, testamentary trusts, revocable trusts and irrevocable trusts. Living trusts become effective as soon as you create them, while testamentary trusts don’t become effective until after your death.
All trusts are either revocable or irrevocable. If you choose a revocable trust, you’ll be able to make changes to its provisions. But you won’t be able to do the same with an irrevocable trust. When you sign up for this kind of trust, you transfer ownership of your assets to another individual or trustee.
What Can You Put in a Living Trust?
Essentially, you can put anything that you own into a living trust. Common examples include:
- Bank accounts: Checking, savings, money market and certificates of deposit.
- Financial investments: Stocks, bonds and other assets.
- Real estate: Land and homes.
- Insurance policies: Life insurance.
- Tangible property: Artwork and furniture.
As an example, if you choose to put your house in a living trust, this can help your heirs avoid probate court and estate taxes, and possibly protect your home from creditors. But while the trust can be designed to avoid probate costs, it must file tax returns and value assets after you die.
You should also note that financial experts sometimes recommend not transferring certain assets to a trust. One example includes retirement assets like IRAs, 401(k)s and 403(b)s. This transfer could trigger income taxes if the retirement assets are treated as a cash out.
Health savings accounts (HSAs) and medical savings accounts (MSAs) are other examples of assets that do not get transferred to living trusts. Money for these accounts is taken pre-tax from your paycheck, therefore you don’t pay taxes on them. So putting them in a trust would not give you additional tax benefits. However, you can name a trust as a beneficiary to facilitate the distribution of assets after you die.
Finally, if you have assets in another country, you may want to confirm with an estate lawyer in that country whether you can move these international assets to a U.S.-based trust.
How Much Does a Trust Cost?
If you hire an attorney to build your trust, you’ll likely pay the average cost of setting up a trust, which is in the range of $1,500 to $2,500. The overall cost will depend on whether you are single or married, how complex the trust needs to be and what state you and your assets are in.
Fees for living trusts in Ohio, for example, are likely to be different from those for living trusts in New York. Other variables include the probate or estate planning lawyer’s time and expertise. Some highly complex trusts of wealthy people cost upwards of $5,000 to $7,000.
Aside from creating a trust, there will be additional costs for drafting documents transferring property and assets into the trust. These additional costs can range from $350 to several thousand dollars. This is because the paperwork and legal filing paperwork has a fee and can take up another chunk of time to complete.
There are multiple advantages to using an attorney, though. One is that this route ensures that your trust and legal documents are prepared correctly. However, this can be an expensive option for some, so it’s also wise to consider the DIY approach when creating a living trust.
The DIY method is significantly less expensive than hiring an attorney. However, this approach can be a bit riskier because you aren’t hiring a professional to set up the trust for you. If you choose this option, you can typically use online software to build your trust, and it’ll cost you only a few hundred dollars.
There is a middle ground between hiring a lawyer to do the work or taking the DIY route: paying a lawyer to review the trust you have prepared using an online service like LegalZoom.
Bottom Line
Living trusts are one of the many estate planning options you can use to protect your assets and your loved ones after you’ve passed away. Trust costs will vary depending on your location, the complexity of the trust and which method you use to set them up. But your two main options will be to hire an attorney or to form the trust yourself.
Tips for Estate Planning
- A financial advisor can help you with your estate plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re passing a large estate to your beneficiaries, you may run into estate taxes. It’s important to do your research on the federal estate tax and state estate tax rates so you won’t be blindsided.
Photo credit: ©iStock.com/AndreyPopov, ©iStock.com/undefined undefined, ©iStock.com/cagkansayin