3 Benefits of Using a Living Trust to Pass an Inheritance to Your Family

One of the main reasons I work hard and try to generate wealth is to be able to pass it on to my loved ones when I'm no longer with them. I know I'm not alone in this sentiment, either. Countless people will tell you the same thing.

Unfortunately, this process isn't always straightforward because there are multiple ways to approach it. Many people are familiar with wills, but there are other ways of passing on an inheritance, such as a living trust. The latter might not be the best option for everyone, but it has key benefits you shouldn't overlook.

Here are three reasons to consider a living trust for those in the estate planning process.

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1. You can avoid the probate process that many people strongly dislike

A significant advantage of using a living trust is to avoid probate, a court process that determines a will's validity and oversees the distribution of the deceased person's assets. Having legal oversight during the distribution process can be useful to ensure fairness, but the cons of probate can sometimes outweigh the pros.

The probate process can often take a long time to complete, sometimes months or years. During this time, your beneficiaries most likely won't have access to the assets left for them, either. It's also not a cheap process. With court costs, lawyer fees, and other expenses, the process can eat into the inheritance left behind.

For example, in California, probate attorney fees and executor commissions are based on the gross value of the estate as follows:

  • 4% on the first $100,000
  • 3% on the next $100,000
  • 2% on the next $800,000
  • 1% on the next $9 million
  • 0.5% on the next $15 million
  • A court-decided amount for any estate valued over $25 million

If you had an estate worth $2 million, you would pay out $33,000 in fees.

A living trust can help avoid probate because the benefactor doesn't own the assets within the trust. When you pass away, the assets in the trust can typically be distributed to your beneficiaries without court oversight, saving time and money.

2. There's a greater degree of privacy with a living trust

There have been countless instances when the distribution of an inheritance became a messy process. Luckily, a living trust offers a degree of privacy you won't receive with a will.

When a will goes through the probate process, it becomes a public document accessible by anyone. People can potentially get information about the deceased's assets, their value, and who inherited them.

In a living trust, details about the trust (like its assets, beneficiaries, and terms) generally don't become part of the public record. This can be especially useful for people who want to avoid potential conflicts within their families or those who don't want to put a spotlight on the beneficiaries.

For example, let's imagine someone leaves a large inheritance to a young beneficiary who might not be financially savvy or mature enough to handle a sudden influx of wealth. Having this information made public could make this beneficiary vulnerable to financial predators or create bad blood with family members or friends who feel entitled to some of the inheritance.

A living trust gives you privacy that could help people avoid those situations.

3. Flexibility allows you to adjust to changing life circumstances

Living trusts are also known as revocable trusts, meaning they can be changed or revoked entirely while you're alive. This flexibility is important because it allows you to respond to major life changes. You could get married, divorced, have or lose children, or experience a tangible change in your financial situation. Whatever the case, having the option to modify your living trust is extremely useful.

Thankfully, changing a living trust is fairly straightforward. Minor changes like adding a new beneficiary can usually be made with a simple amendment.

More significant changes, like an overhaul of the distribution process, might require a full redo of the trust. Either way, being able to update your living trust can help ensure it accurately reflects your current desires and situation.

You can also change your revocable trust into an irrevocable one, typically for tax planning or asset protection. Doing so locks in the trust's terms and might limit or relinquish your control over the included assets. This process isn't for everyone, but it's a testament to the flexibility of living trusts.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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