How to Use a Living Trust to Avoid Probate

Introduction: Skip the Stress, Not the Planning

Many families assume that having a will is enough, but wills still go through probate. A lengthy, expensive court process for distributing assets and validating the will. Strangers can look up your probate’s public records, uncovering who got what assets.

A living trust can help you completely bypass probate, keeping your assets private and ensuring your loved ones receive them quickly and efficiently. Let’s go over what a living trust is, how it avoids probate, and the steps to set one up.

What Is Probate?

Probate is the court-supervised process of validating a will, paying debts, and distributing assets.

Probate can be a problem because:

• Often takes 9 to 18 months (or longer)
• Costs around 3% to 7% of the estate in fees

Probate court records are public. Anyone can see what you own and who inherits what. Your nosy neighbors, your distant relatives, your coworkers, your enemies, and even utter strangers. They will all be able to access the probate records.

To make matters worse, the probate process can delay access to assets and cause stress at an already difficult time.

What Is a Living Trust?

A living trust is a legal document that lets you transfer ownership of your assets to a trust while you’re alive. Revocable trusts can be modified as you wish. Irrevocable trusts are harder to modify.

Parties involved in a living trust

Grantor: You, the person who creates and funds the trust

Trustee: The person (often you) who manages the assets

Successor trustee: Takes over when you pass away or become incapacitated

Beneficiaries: The people or organizations who will receive your assets.

The unique benefit of a living trust is that unlike a will, a living trust goes into effect while you’re alive. Your successor trustee would manage the trust if you die.

How a Living Trust Helps You Avoid Probate

With a living trust, you are meant to transfer ownership of assets to the trust while alive. This means that the trust becomes the legal owner of those assets.

Despite losing legal ownership, you still essentially retain full control because you are the trustee. As the trustee, you can buy, sell, or modify assets within the trust at any time.

Upon death, your successor trustee steps in. They will then distribute the assets to beneficiaries. Directly, without court involvement. There is no probate court if you correctly set up a living trust.

As a result of your living trust, there are:

• No probate delays
• No public filings
• Fewer legal fees

Case study and example

Without a trust: You make a will going over asset distribution. Your home is tied up in probate for over 12 months. It’s stressful for your loved ones and strangers are able to see the probate court details. 5% of the estate’s value turns into court fees.

With a trust: You retain control of your assets while alive because you are the trust’s trustee. After passing away, your successor trustee privately transfers ownership to your heirs within weeks.

Step-by-Step: Setting Up a Living Trust

1. Decide what you want to accomplish

First, consider what you are aiming for regarding the living trust and your estate in general. Do you want to avoid probate, maintain privacy, or protect family members?

2. Choose your trustee and successor trustee

Many people choose themselves, the grantor, as the trustee for a living trust. They themselves will be the one to manage and deal with the trust’s taxes and other needs. However, some people may hire a professional or pick a trusted loved one to be their living trust’s trustee.

You need to pick someone responsible and trustworthy to be your successor trustee. After you die, the successor trustee will be the one to manage your trust and distribute your assets as you had designated.

3. List your beneficiaries

The beneficiaries are the heirs who will receive certain assets of yours once you pass away. The beneficiary can be people, like family members and friends, or institutions, like charities. Think about who will inherit your various assets.

You may also want to list backup beneficiaries in case the main ones are unable or unwilling to inherit the assets.

4. Decide who gets what and how

Assets don’t have to all be given at once. A major advantage to estate planning is that you will get to choose how your assets are distributed: who gets them? And how? You can give them money in a lump sum, staggered payments, or other methods that you think will be most suitable.

For example, if you know your beneficiary has poor spending habits, you can opt to give them money through the trust in staggered, long-term payments or give conditions/incentives for when the money can be granted. That way they will not spend all of the money at once.

5. Create your trust document

Creating a trust can feel like a daunting task. However, these days, you can easily create legally valid trusts using an online platform. LegalZoom is our favorite trust creation platform because it is reliable and affordable. You can also use an attorney for estate planning, which is particularly useful if you have a complex estate.

6. Fund the trust

Don’t forget to put assets into the trust. Assets come in many forms, from properties to investments. You need to transfer ownership of these assets into the trust’s name.

This step is crucial because an unfunded trust doesn’t avoid probate. More people than you might expect end up forgetting to fund their trust, forcing the probate process to occur after their untimely death.

Afterwards

What should you do after you have set up and funded the living trust? It’s time to make sure your documents are safely stored and accessible to your trustee. Keep digital and/or physical living trust copies in a secure location and share access with your successor trustee.

What Assets Should Go Into Your Trust

Good candidates

Real estate: Living trusts let you quickly transfer real estate. This can be valuable because properties are often one of the most expensive assets people own.

Life insurance: If you have life insurance, you can put it into your trust to avoid certain issues like creditors chasing you down. This may also have estate tax advantages, though it depends on your situation. Ethos offers affordable insurance products.

Business interests: Probate court can make transferring business assets difficult. If you have family business interests, sole proprietorships, partnership shares, or other relevant business assets, you may want to place them into a living trust.

Valuable personal items: Expensive items like art, jewelry, and antiques can benefit from being placed into a living trust.

What could be valuable in a living trust

Financial accounts: Bonds, stocks, checking accounts, and other accounts could be placed into a trust. However, transferring them into your trust could have tax implications. Speaking with a financial advisor familiar with trusts and estate planning can be a good idea.

What should NOT be in a living trust

While this changes depending on your goals and situation, these are typically not recommended to be placed into a living trust.

Retirement accounts: 401(k)s and IRAs should not be placed into living trusts. You may want to name your living trust as the retirement accounts’ beneficiary instead. If you put these accounts into a living trust, it can trigger an income tax problem.

Vehicles: Rules vary by state, but generally, everyday vehicles (i.e. non-collectibles) do not go through probate court. Many states impose a tax when the vehicles get retitled. Some do not even allow vehicle owners to name a beneficiary after death, so they should not be placed into a living trust.

Other Benefits of a Living Trust

Privacy

Wills are faster to create than trusts–however, the probate process turns will into public records. Anyone who wants to go snooping could see your will details, which can be concerning and stressful for your loved ones.

Unlike wills, trusts aren’t public record. Your loved ones and you get to retain privacy over what assets are distributed to whom.

Continuity

If you become incapacitated, your trustee can step in to manage assets immediately. This ensures your assets and accounts will still remain well managed.

Flexibility

A revocable trust can be changed or canceled at any time. This gives you more control over your trust. Most people opt for a revocable living trust for better flexibility.

Although, you can also create an irrevocable trust if you have any particular goals, such as better asset protection or charity missions. We recommend carefully thinking over the pros and cons of an irrevocable trust before setting one up because they are much harder to modify.

Peace of mind

Probate court can take a long time, a significant amount of money, and cause confusion regarding how assets should be distributed. With the help of a living trust, your loved ones can avoid the court process, extra costs, and confusion. Reducing family conflict and providing you with peace of mind is a major benefit of living trusts.

Common Mistakes to Avoid

Here are common mistakes that go with establishing a living trust.

• Not funding the trust after creating it
• Forgetting to update it after life changes (marriage, divorce, new child)
• Naming an untrustworthy trustee
• Choosing an irrevocable trust without thinking it through
• Assuming a trust replaces all other documents

A living trust is a major beneficial legal arrangement that is part of the estate planning process, but it should not make up all of your estate plan. You still benefit from a “pour-over” will, powers of attorney, advance medical directives, and more. Consult with an expert estate advisor if you have concerns or questions.

How Life Insurance Complements a Living Trust

Life insurance provides immediate financial support while assets transfer. You can either place life insurance in a trust or not, depending on whether it provides a benefit to you. Most people name the trust as the policy beneficiary to control how funds are distributed.

Tip: Ethos offers simple, fast, and affordable life insurance that can work seamlessly with your estate plan.

The Cost of a Living Trust vs. the Cost of Probate

A few hundred dollars to set up a trust can save your heirs thousands in fees and months of delay. The probate process can cause emotional distress and is also concerningly public. Still, we understand that sparing hundreds of dollars at once can be difficult.

For an affordable start, we recommend using online services like LegalZoom. LegalZoom makes this process simpler and cheaper for most families.

Give Your Family a Smooth Path Forward

Use a living trust to skip the probate process to save money, keep your asset distribution private, and prevent stress. It can also have financial benefits while you’re alive, making it easy to transfer away ownership of real estate and other assets.

Start small. List your assets and explore creating a trust today using LegalZoom.