After you pass away, your family may have to contend with probate, in which a court reviews and distributes your assets.
The process can be lengthy and expensive, and the details become part of the public record. If you want to simplify and privatize the process of passing on assets, consider putting the property in a revocable trust.
“When a trust owns or has title to assets, those assets are considered to be outside of the probate estate, meaning they will pass to the designated recipient without the need of court oversight or control,” says David DuFault, an estate attorney in Charlotte, North Carolina. With a revocable trust (also known as a living trust), you can change the terms or revoke it at any time.
With the help of an estate attorney, you can draw up a declaration of trust, a legal document that determines how the assets will be held in your trust. As the trust’s creator, you are the grantor. During your lifetime, you’ll typically also want to be the trustee—the person who makes decisions about the trust.
If you’re married, you can name your spouse as co-trustee, and you’ll also designate a successor trustee who could manage the trust in case you reach a point that you can no longer make decisions yourself. After you die, your successor trustee divides the assets in the trust according to your wishes.
Once you create the trust, sign it with a notary public as a witness. Next, you should transfer your property into the trust. To put your home in the trust, you’ll need to sign a new deed that names the trust as the property owner.
To put bank and brokerage accounts in the trust, you’ll have to open new accounts in the name of the trust. If you have physical stock and bond certificates, you may need to enlist the help of a stock transfer agent or bond issuer to change ownership to the trust. If you want to add personal property such as jewelry or collectibles, you probably don’t need to retitle them, but you should write up instructions that they are to be included in the trust.
Don’t put a health savings account or retirement accounts such as a 401(k), an individual retirement account, or tax-deferred annuities in a trust. The transfer would be considered a distribution, and you would owe income tax on the entire amount.
Once you transfer property into your trust, store the documentation in a safe place, such as a safe deposit box, and keep a digital copy securely online, using a service such as Dropbox.
The cost of setting up a trust depends on its complexity and your location. Attorney fees may range from $1,500 to $2,500, and deed-transfer fees may run $500 to $1,000.
Taxation varies by state, but some general rules usually apply. During the time the grantor remains in control of the assets owned by a revocable trust, the grantor is still taxed as though he or she is the owner, says DuFault. All income and deductions from the trust are reported on your tax return, and you pay tax at your personal income tax rate.
