Do you really need a living trust if you don’t own a house or any other real estate?
Maybe you already have a will, a few bank accounts, some retirement accounts, and a little life insurance. The short answer is no, you probably don’t need a living trust if you don’t own real estate.
But there are a few situations where you might want one anyway, even without a home. Let me walk you through when a trust still makes sense.
Why Anyone Sets Up a Living Trust
There are two main reasons.
To avoid probate court. Probate is where your family has to go to receive their inheritance when there is nothing in place directing who gets your assets. This matters most with real estate. If you die owning real estate with only a will, or no plan at all, your family ends up in probate to receive the property. That can mean one to three years in court and tens of thousands of dollars in attorney’s fees before they receive anything. A trust lets your children receive the property seamlessly, without court.
To make sure your loved ones receive their inheritance. Like a will, your trust can clearly say who receives your house and who receives your money when you pass away.
If You Only Have Accounts, a Will May Be Enough
If you just have bank accounts, retirement accounts, and life insurance, you do not necessarily need a trust. A will that says who receives your assets, paired with a few key steps, is often enough:
- Make sure all of your financial accounts have death beneficiaries on file with the banks and financial institutions.
- Make sure your retirement plans, including IRAs, pensions, and 401(k)s, have death beneficiaries so they do not end up in probate.
- Make sure your life insurance has named beneficiaries.
- Have a will that is consistent with those beneficiary designations.
From there, add a health care directive, a power of attorney, and a HIPAA authorization, and usually that is all you need.
When You Still Need a Trust Without Real Estate
Here are the situations where a trust is worth setting up even if you do not own a home right now.
You Plan to Own Real Estate in the Future
If you are planning to buy real estate next year, it does not make sense to spend time and money on a will now, then replace it with a trust next year. You might as well set up the trust now.
It is also better to have the trust in place before you buy. A lot of people call me a few days or weeks before closing, scrambling to set up a trust to protect the property from probate. I can do that, but it is rushed, and you want time to think through your plan thoughtfully. If you expect to buy real estate in the next several years, set up the trust now. When you are ready to buy, you simply put the property into it.
You Want to Control How Your Children Spend Their Inheritance
Say you have $100,000, half a million, or a million dollars in the bank, and you want that money used for your children’s education, living expenses, and health care.
Here is the question I ask parents. If you passed away and your kids were 18 or older, would you be comfortable with them taking their entire inheritance all at once, with no supervision, to spend however they want?
Almost every parent I work with says no. Whether their kids are teenagers, in college, or even in their 20s, 30s, or 40s, they worry that a lump sum of six or seven figures will just get blown. I once heard that on average a beneficiary goes through their entire inheritance in less than two years. People who receive a large lump sum often do not know how to handle it, and they make mistakes.
A trust solves this. You can leave everything to your children but name someone, say their Uncle Tom, to manage the inheritance as trustee. Uncle Tom can approve college tuition or a reasonable car, and say no to the Lamborghini. He steps into your place to make sure your children spend wisely instead of wasting it.
You can also build in structured distributions by age. For example, your trust can say that at 25 your child can take out half of their inheritance to do anything they want with, while the trustee still oversees the rest. Then at 30 or 35 they can take out the remainder.
This structure does two things. It controls their spending, and it gives them room to make mistakes. If they mishandle the first portion, they get a second and third chance to make wiser decisions later in life. We cannot control our children completely, but we can set them up for success.
You Want to Protect Your Financial Accounts from Probate
A lot of people have six or seven figures in the bank with beneficiary designations, and assume those accounts are safe from probate. They are not always.
Here is how it goes wrong. Say you named one of your sons as the beneficiary, and he passes away with you in an accident, and there is no contingent beneficiary. That account now goes to probate. The same thing happens if your contingent beneficiary also passes with you. It is uncommon, but it happens.
Financial account beneficiary designations usually only go one, two, or sometimes three levels deep. So what happens if all of those people pass away? The account ends up in court.
The way to be certain your accounts stay out of probate is to put them in a trust. When the trust owns the account, the trust always controls what happens to it, and it can name backup beneficiaries level after level until it reaches a reasonable stopping point.
You Have a Child or Beneficiary With Special Needs
If a beneficiary receives government benefits because of a disability, you do not want them inheriting money directly. Doing so could disqualify them from their benefits, because they would suddenly have assets.
Instead, you structure the distribution through a special needs trust, or a living trust with special needs provisions. That way the inheritance is theirs, but it does not cost them their government assistance. If you do not plan ahead, your special needs beneficiary could lose the benefits they rely on.
You Want to Protect Your Children from Divorce
A trust can also protect your children’s inheritance from their own divorce, so a former spouse cannot walk away with a piece of it. You can structure the trust to prevent that scenario.
Educate Yourself Before You Decide
Whether you are leaning toward a will or a trust, educate yourself before you hire a lawyer or do it yourself. If you understand the process, you can ask better questions and end up with a more thoughtful plan. And if you are doing it yourself, you need to know the whole process from start to finish.
Ready to Set Up Your Plan the Right Way?
Take the free trust class. I teach you how to make your own living trust the right way, so you can protect your assets from probate with confidence and without mistakes. It is also a great primer if you plan to hire a lawyer and want to understand the process first. Register at freetrustclass.com.
Book a free phone consultation. If you would rather have it handled for you, talk with our team about a plan built around your family. Call us at (408) 412-1913 or visit treeoflife.legal.
Subscribe on YouTube. I post new videos every week on living trusts and how to do it yourself.
My goal is to help you keep more money in the family and give you the peace of mind you deserve. The right plan is one of the best gifts you can leave your family for when you are no longer here.
Disclaimer: I am not your lawyer, and this article is not legal advice. It is information only. Reading it does not create an attorney-client relationship. If you have a legal question, please talk to a lawyer.
