If you own investment property, estate planning can be an important tool to manage your assets and ensure they reach your designated beneficiaries. One way to accomplish this is with a living trust.
Setting up a viable living trust requires specific steps and costs involved. Knowing what’s involved can help streamline the process.
Living Trust: A Definition
A living trust is a legal arrangement established while you’re alive. You, as the grantor, transfer your assets to a designated trustee. That trustee manages the assets and distributes them to your beneficiaries.
A well-planned living trust can help reduce legal complexity and probate involvement after you die, helping facilitate that your assets end up in the hands of your designated heirs or beneficiaries.
Steps to Establishing a Living Trust
While living trusts are dictated by the state where you live, the general formation process consists of the following:
#1–Know your assets. Put together a list of all your assets, then determine which ones will be transferred to the trust. Assets might include investment real estate, stocks and bonds, or bank accounts.
#2–Select a trustee. The trustee handles the trust’s assets. You could name yourself as a trustee–many people do. You could also name a successor trustee to ensure the trust is well-managed should you be unable to do so. Another option is selecting a professional trustee (like a bank) to manage the trust. Whatever you decide, as best you can, be sure the trustee you choose has integrity and is dependable and ethical.
#3–Determine your beneficiaries. The beneficiaries are the ones who receive the trust’s assets after you die. These differ from heirs, who automatically inherit your property if no will or trust is involved.
#4–Create the document. You develop a legal document that outlines the trustee’s responsibilities and asset disposition when you die. If the trust is complex, work with an estate attorney to ensure the correct language is used. You might choose an online platform or DIY trust kit for simpler estates.
#5–Transfer the assets. This is accomplished by changing the assets’ titles from your ownership to the trust’s name.
#6–Sign and notarize. Whether you work through an attorney or decide to do it yourself, you must notarize the trust’s legal document by signing it before a notary. Failure to do so can mean an invalid trust.
Cost Considerations
Setting up a living trust doesn’t just happen. It requires knowledgeable personnel and activities that cost money. Some of the expenses involved include:
- Estate planning attorney fees (or DIY trust kit costs)
- Notary and filing fees
- Asset transfer costs
- Trust administration fees (a professional trustee could charge up to 2% of your assets under management value)
Expenses can differ based on where you live and the specific requirements of creating a trust. Be sure to understand the costs upfront to eliminate surprises.
Is the Living Trust Worthwhile?
Depending on your estate and holdings, a living trust may help manage and facilitate the transfer of assets while alive and after your death. Some of the benefits include:
- Control over asset distribution and estate management
- Privacy (unlike wills, which are public records)
- Reduction or avoidance of probate, reducing legal fees and delays
However, living trusts also provide challenges such as:
- Original and ongoing costs
- Set-up complexity and administration
- Continuous paperwork and record-keeping
- Possible loss of asset control
- Taxation issues
Before deciding on a living trust, consider whether you prefer legal guidance or want to set up the trust on your own. Generating a living trust requires footwork, legal understanding, and multiple steps. As such, before deciding to go in this direction, consider your estate’s size and assets and the pros and cons of setting up a living trust. Working with an estate planning expert can help you decide on your best action.
Realized 1031 has expertise in estate planning strategies tailored to real estate investors. For a free portfolio review and a no-obligation consultation, visit the website at realized1031.com.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
