A living trust avoids probate, a time-consuming and expensive court-supervised process to wind up a deceased person’s estate. It also may save estate taxes.
But setting up a living trust comes with expenses of its own. The initial cost is a major consideration, along with the breadth and complexity of the assets involved.
Legal Fees
How much does it cost to make a living trust? Depending on the size of your estate, it may cost at least $1,000 to have an attorney set up a living trust and prepare related documents. This is a much less expensive alternative to a probate process, which can run 3% to 7% of your estate’s value. However, other legal fees can affect your living trust costs – including appraisal fees for assets transferred to the Trust and management fees charged by a trustee. The good news is that most of these fees are deductible as miscellaneous itemized deductions, which aren’t subject to the 2% limit imposed on individual taxpayers.
The type and breadth of your assets also play a role in the overall expense structure. This is because more extensive assets can be complex to administer and require expert advice to value, retitle, or distribute properly. Also, the additional tax implication will likely drive up expenses if your estate includes property in multiple states. Additionally, the services provided by trustees and fiduciaries are generally fully deductible.
Taxes
A living trust is a legal entity holding assets you transfer before death. The support can include your home, family heirlooms, personal property like artwork and furniture, stocks and bonds, bank accounts like checking, savings, money market and certificates of deposit, and financial investments such as mutual funds and business ownership.
A primary benefit of a living trust is that it avoids probate, which can be costly and time-consuming. However, the Trust only avoids probate if you transfer all your assets into it before your death. Your estate must go through probate under state intestacy laws if you don’t.
Additionally, while you can include your 401(k) and IRA in a living trust, changing the title (or ownership structure) of such accounts may trigger early withdrawal penalties from the IRS. Consequently, you must carefully consider your asset and investment portfolio before transferring them into a trust.
Expenses
A living trust is a technique that allows an individual to manage assets while still alive and avoid a lengthy, public, and expensive probate process. The grantor appoints a trustee to control property transferred into the Trust. The Trust may also provide a vehicle to avoid estate taxes but does not allow for a full exemption, and there is no guarantee that the Trust will save tax. A trustee can distribute to Beneficiaries for expenses not covered by government assistance, but there are limits on what expenses will qualify. A common example is the cost of repairing a Beneficiary’s accessible ramp. Other typical fees include personal care expenses, food, and entertainment.
A living trust can be more expensive than a will, but many benefits might justify the extra cost for some individuals.
Expenses for Trust Distribution
For example, transferring property deeds to a trust can take several hours and costs between $350 and $1,500. Other expenses include fees for filing paperwork and the charge of drafting documents to transfer assets and bank accounts into the Trust.
Beneficiary-related expenses such as a new TV, restaurant meals, and hotel stays can be paid using trust funds if permitted in the trust instrument or by state law. Likewise, the expense of a transport vehicle with an accessible ramp may be born with trust funds if it is not covered by government assistance and is not considered a luxury item.
The geographic location of the Trust can also influence costs, as different regions might have other legal requirements and professional service rates. Trustees should carefully document all their expenses and clearly state whether they are for income or expense items. It allows tax professionals to categorize the costs properly for allocation between trustees and beneficiaries. Also, investment and management fees charged to the Trust should be classified as income or expense items according to the specifications in the trust instrument and state law.
Expenses for Estate Administration
Lastly, estate administrative expenses accrue in settling the Trust, including fees for an attorney or accountant and costs associated with appraising or retitling property within the Trust. These expenses are not related to distributing assets but are accrued in managing, protecting, and maintaining real and tangible property that your loved one left behind.
It is important to note that executors cannot reimburse themselves for out-of-pocket estate expenses or use the trust funds to pay for them. This is considered a conflict of interest and can lead to legal action by beneficiaries or heirs. Instead, executors should carefully keep track of all expenses, and a spreadsheet is often an effective tool.
Taking a proactive approach to estate planning and working with an experienced probate attorney can significantly reduce the cost of settling a trust.
