Broker Check

Trust or Lady Bird Deed?

November 28, 2023

          Lately, I've been having more conversations with clients about their estate planning goals. One common theme is whether or not they should get a revocable living trust or not. The biggest concern that most people have is how to avoid the dreaded probate process for the beneficiaries. 

          Probate is the legal process an estate goes through after someone passes away. A simple will names who gets your stuff after you die and is part of the probate process. However, during probate, people can come out of the woodwork looking for what they feel is rightfully their inheritance and contest the will. This could tie up the distribution of your assets for a long time and potentially cost tens of thousands of dollars in legal fees to the estate. 

          A Revocable Living Trust avoids this process. By appointing a successor trustee, they handle the distribution of the assets after you die without having to go through probate. A Lady Bird Deed also avoids probate on your home and names "Remaindermen" (beneficiaries) on the deed. Even though both a Trust and a Lady Bird Deed avoid probate, here are some advantages and disadvantages to both. 

Revocable Living Trust 

          Think of an RLT as an empty box. You put your stuff in the box and name someone else (successor trustee) to manage it for you in the event of your death or incapacity. Upon your death, the successor trustee applies for an EIN (entity identification number) for the trust, which now becomes its own tax paying entity each year. Unlike name a beneficiary or a TOD (transfer on death) on an investment account, the trust can continue on for years after death. This is an effective way to pay out your beneficiaries over a longer period of time. Let's say you have a child that may have a drug or alcohol problem, a trust may be able to provide for their welfare giving the trustee discretion to withhold payments if they are currently using. The disadvantage of a trust is the expense. It could cost a couple thousand dollars in legal fees to set up and the ongoing administration of the trust could cost up to 3% of the assets in the trust, annually. 

Lady Bird Deed 

          A Lady Bird Deed is designed to list beneficiaries on your home to avoid probate. Unlike a trust, once the owner of the property dies, the asset is immediately retitled in the names of the beneficiaries as tenets in common. This could lead to issues though if your beneficiaries don't all agree to sell the house, since they all will own a fractional share of the home, and nothing directs them to have to sell. A Lady Bird Deed is far more cost effective, as long as your intention is to simply avoid the probate process for your heirs and leave them your home with no strings attached. 

          Careful thought about how you would like to see your lifetime's worth of savings and investments be passed on is an important part of the financial planning process. Most people don't really think much about it, until I bring it up and sometimes that even opens up a can of worms. Clients really start making critical decisions about their estate planning then. If you have any questions about this or any other financial planning goal, feel free to give us a call and chat!