A few years ago, my wife and I got our wills completed. That made us feel great! With our life insurance and will complete, we're now protecting our family if the unexpected were to occur. My next goal was to look into a living trust.
I've heard from friends and family that a living trust is something we need, but I wasn't sure why. I decided to look into it a bit more. Here is what I learned…
What is a Living Trust?
Tomorrow tells me a living trust is something “you create and fund during your lifetime that contains provisions about how the trust assets should be distributed during your lifetime and after your death.”
Translated into Andy-ese … I transfer ownership of all of my assets to a trust before I die so my kids and my wife are already set to receive everything with no questions asked.
What is the difference between a Living Trust and a Will?
With a will, you designate where you’ll be buried, who your kids are going to go to, and where your assets will go. The living trust only deals with your assets.
The biggest advantage of having a Living Trust over a Will is that you avoid probate court.
What is probate court?
After someone dies, probate court helps distribute a person's assets so that all of their debts are paid and the folks who inherit assets are given their share.
Why would you want to avoid probate court?
There are fees associated with probate court and some people don’t want their families to deal with the hassle of the courts after they’ve died.
How much are the probate fees?
It completely depends on where you live. I checked with my county and found out they would charge $987.50 (+ $175 application fee) for probate if I were to die. A total of $1,162.50.
Sounds like a lot of money, right? Even with that $1,100, I still don't think we need a living trust right now.
5 Reasons We Don't Need a Living Trust Right Now
1. Time Consuming
- The living trust process requires you to transfer all of your assets (home, bank accounts, IRAs, 401ks, Brokerage Accounts, Cars) out of your name and into the trust's name.
- If there are any changes in your life (selling your car/home) then you need to transfer the asset out of the trust so you can sell it. What if you want to get a new house or car? Then that needs to be transferred into the trust. Yikes!
- Constantly making sure the living trust is updated sounds extremely cumbersome and ripe for some major mistakes. The natural reaction would be to get a lawyer to set it up and help you maintain it.
- I guarantee that the costs to work with a lawyer on the initial set up and maintenance with changes over the next 60 years of our lives (we're 35 by the way) will be more than the $1,100 in probate fees I mentioned previously.
3. I’m Not Bonkers Rich
- Since my probate fees are so low, I’m not too worried about the overall cost right now.
- If I become a decamillionaire (sweet!), then I will be more concerned about the probate court fees. At this point in my mid-30’s, I’m comfortable with covering those costs from our emergency fund.
4. I Don’t Have a Complicated Financial Situation
- I’m just a typical dude with one house, one bank account, one 401k, a car and a Roth IRA. I don’t own any businesses (well, there’s this one, but if I die, the show and blog are dying too).
- I don’t own out-of-state properties.
- Based on some research (AKA watching a bunch of videos of lawyers on YouTube), I feel like our situation is pretty straightforward.
- Right now, all of these assets (minus the car) are either designated to my wife Nicole or they have her set as the co-owner.
5. Taxes Become More Difficult
- According to a Legal Zoom, if your assets in your trust earn income (brokerage account, etc), then you have to file a separate tax return for your trust as well!
- Cha-ching! That sounds like a much more complicated tax filing process in my opinion. That would mean I’d need to get a tax advisor to support me with that nuanced process. There's some additional money spent right there.
The list goes on, but I’ll stop at 5 reasons.
For Me, A Will Will Do
At this point in my mid-30’s, I feel setting up a will is good enough for me and my family. I will caveat this one BIG TIME in saying that I’m not a lawyer, I’m not a tax advisor or a CPA. From my humble internet research, it appears that a living trust is not for me.
It all depends on your situation, of course.
I’m mid-30s and we set up a living trust a couple years ago. We have two full time jobs, own in and out of state property, cars, retirement and brokerage accounts, plus some business income so our taxes are just complex enough that we use a tax professional to save time. We also have one minor child.
A will and designating each other as co-owners on everything would work if just one of us passed, but we primarily wanted our assets to be in a trust in case anything happened to both of us. Also in case I’m the one who goes first, it’ll be easier to have everything in the trust already because my spouse doesn’t manage our household assets, I do. I particularly wanted our assets to be managed by financially responsible people who would look out for our child’s financial welfare like I would. However the person managing those assets wouldn’t be the person I’d ask to raise our child. The designated guardian isn’t quite as savvy with money and I also prefer to separate the jobs between the person taking care of my child and the person taking care of zir money because though I know they are good people, sometimes bad circumstances happen and people feel pressed to access money designated for a minor child, leaving them without funds for their education and so on. I believe in trusting people but also setting up systems so that it works the way we would want it to work.
As for buying and selling a property through a trust, at least here in California the complication has been minimal. We just had to take ownership in the name of the trust and the seller had to sell in the name of the trust. There was no extra work involved for us other than the bank doing their due diligence that the trust exists and is ours/the sellers. It was maybe 2 extra pages of work. So that part just sounds more daunting than it actually is.
Thank you for sharing this! Your situation totally makes sense for a living trust. And I really appreciate your rationale for why you set it up. You’re setting your child up for success.
Great summary Andy! Things with designated beneficiaries can avoid probate court too (your 401k and bank if you’ve designated someone to receive the money if you die plus all jointly held assets). My conclusion is the same…when (okay, if) I become a decamillionare I’ll get that trust going.
Yet another reason! Thank you Kathryn!