Living Trusts: Why Most People Never Fund Them Properly

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Living Trusts: The Truth About What They Do (And Don't Do)

Okay, we're in part three of estate planning where we're talking about wills, living trusts, etc. The last two episodes I've kind of taken a deep dive into wills.

This time we're going to talk to all y'all who are interested in or have a living trust. My hope is that you'll understand what it is, what it's not, what it does, what it doesn't do, etc. So let's get going.

What Is a Living Trust?

First of all, what is a living trust? A living trust is a legal document that holds your assets during your lifetime. Remember how we talked about a will? It doesn't do jack squat for you until you're dead. But a living trust is different.

It holds your assets during your lifetime. And the key players in any living trust are you—you're the grantor, you again, you might be the trustee, and your beneficiaries.

And the concept is basically that you transfer the ownership of your assets from your name into the name of the trust. It's called titling. And then when we talk about trusts, there are kind of two different types. We see revocable ones, which means you can change it, and irrevocable ones, which means you can't change it.

And most people—like over my career, I've seen that most people have revocable living trusts, which means they can be changed. So think of it kind of like creating a business entity to hold all of your stuff.

What People Think Trusts Do vs. Reality

Okay, so now that we've got that in place, let's talk about what people think trusts do versus what they do in reality.

What people think and what people tell me:

• It saves taxes. No, it doesn't.

• It protects assets from creditors. Revocable trusts don't.

• It automatically handles everything for them when they die. No.

  
  

What trusts actually do:

• It helps avoid probate court, which we've already talked about, for assets properly titled in the name of the trust. That is the key—for assets properly titled or primarily titled in the name of the trust.

• It actually does provide some privacy because trust distributions are private, unlike probate, which we've already discussed is public.

• And it also provides some continuity. So it allows for some seamless management if you become incapacitated. And believe me, as you get a lot, a lot, a lot of gray hair, you may become incapacitated. So trusts can be really good in that example.

  
  

The Control Factor

The other thing I like about trusts is they give you control. They allow you to specify exactly how your assets are distributed, when, etc. Some people think of it as control from the grave.

The Big Problem: Most People Never Fund Their Trust

Okay, so the problem is that most people—I'm not even kidding—most people never properly fund their trust. So they go out and they spend all this money and they do all these complex strategies and they're thinking and they follow what their attorney says.

And then they don't do the thing. And the thing is titling everything in the name of the trust.

So if your house or your bank account and your investments are still in your name, when you pass away, the trust is completely worthless. Yes, I have seen this over and over again.

The Attorney Problem

Listen, I think attorneys are fantastic, but trust attorneys often oversell the benefits and downplay simpler alternatives. So by comparison, setting up a living trust can cost $2,000 to $5,000, whereas a simple will with beneficiary designations can cost you $500 to $1,000.

So attorneys often want to sell those higher ticket items—makes sense, they got to feed their families—but they often do that through scaring people about probate being super expensive and time-consuming. Whereas in reality, most states offer really simple probate steps and it's really straightforward and not dramatically more expensive.

You're a Good Candidate for a Living Trust If...

You know, you're a good candidate for a living trust if:

• You own real estate in multiple states

• You have minor children and you want to control the flow of distribution and money from the grave

• You have complex inheritance wishes

• You are all about your privacy and you want to avoid public records from probate

• You have substantial assets and want a professional managing the continuity of those assets after you've passed away

  
  

If You Already Have a Trust

If you already have a trust, let this episode be a reminder that you want to do the audit. So you want to check to see if your assets are actually titled in the name of your trust.

And it's time to review your beneficiary designations on retirement accounts and life insurance. Make sure that your trust includes a pour-over provision for any forgotten assets. That's super important.

Before You Get a Living Trust

If you're somebody that's considering getting a living trust put in place, I would recommend that you get a second opinion beyond the attorney that's just trying to sell it to you. So consider whether or not beneficiary designations and just a simple will could accomplish your goals and don't let the fear of probate drive this expensive decision.

The Bottom Line

Living trusts aren't magic. They're tools that work well for certain situations, but they're not automatic solutions to estate planning problems. The biggest issue I see is people spending thousands on trusts they never properly fund, making them completely useless.

Don't let attorneys scare you into expensive solutions when simpler options might work just fine for your situation. And if you do get a trust, make sure you actually put your assets in it—otherwise, you've just bought a very expensive piece of paper.

If you have any questions, don't hesitate to ask. You know, I'm full of opinions. I'll talk to you soon.

Please note that the information provided includes references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to you to assist in understanding the issues. Consult your own attorney and/or accountant regarding the application of the information provided as to the facts and circumstances of your particular situation.