Life is short. And while no one wants to focus on the end, forcing yourself to do so can ultimately makes things a bit easier for your loved ones -- not just emotionally, but financially too. One way to deal with the latter concern is to put your home in a living trust.
A living trust is a legal document that places your assets into a trust for your benefit (you're the trustee) while you're alive and then transfers those assets, via your "successor trustee," to beneficiaries after you die or become disabled.
Think of it as a bucket filled with your money, property, and other assets. You're free to do whatever you want with the contents of the bucket, such as sell stock or property. But after you're gone, whatever's left in the bucket goes to your heirs.
How is a living trust different from a will?
Like a living trust, a will is a legal document that instructs how to distribute your possessions after your death. If you have a will when you pass away, your estate goes into "probate," a legal process where the court supervises the distribution of your estate. It appoints somebody (usually your executor) to collect information about your assets and liabilities, pay your bills, then distribute the remainder of the estate to your beneficiaries according to your wishes. Probate includes a lot of paperwork and can take up to a year.
However, if you set up a living trust while you're alive, you typically pay a lawyer anywhere from $1,500 to $3,000 to do the paperwork ahead of time and avoid court supervision of the most valuable items you own after you're gone.
"You've done all the paperwork so your loved ones don't have to," says Lorni Sharrow, an estates and trusts attorney with the Denver law firm Moye White. "It's a pretty nice thing to do for people."
Whatever you've placed in the trust can be distributed in a matter of weeks after your demise, not months. And as a bonus, a living trust is private, whereas a will is a public document, so everyone knows what and how much you did (or didn't) leave to your least favorite relatives.
So, should you put your home in a living trust?
Yes. There's no point in having a living trust unless you fund it with your assets, and your home typically is your largest asset. If you own vacation homes in different states, it's especially important to put those in the trust, too, to avoid separate probate proceedings in those states.
You still need a will to designate who gets the antique clock or your coveted spoon collection. But you should make sure all your big-ticket items -- specifically any property you own -- are covered by a trust.
To place a property in a living trust, ask the attorney who drew up the trust to draw up a new deed in the name of the trust. If you have a mortgage, notify your lender that you're putting the property in a living trust to avoid confusion later.
It's also a good idea to keep a list of what's in the trust, which will make life easier for your successor trustee.
"Estate planning goes to the bottom of everybody's to-do list," Sharrow says, explaining that only about 20% of Americans have a living trust. "But once they sign a living trust, the weight of the world is off their shoulders."
Revocable vs. irrevocable trust: Which is right?
As the creator of the trust, you will also have to choose between having a revocable or an irrevocable trust. A revocable trust is just what it sounds like -- you can change what property is in your trust, or even the very existence of the trust itself. It works best for "a client who wants to maintain control over his or her assets, right up until the moment he or she can no longer mentally do so, at which point a designated trustee is ready to step in," according to Life Health Pro.
An irrevocable trust, by contrast, is one where once you create it, you can't take things in or out, or dissolve it. As such, this trust is not included in your estate's value, on which you'll pay taxes -- so an irrevocable trust can save you some money come tax time. Still, due to this lack of flexibility, in most instances, the irrevocable trust makes more long-term financial sense. A discussion with an estate planner can clear up which kind of trust is best for you.