Excellent question. I’m glad you asked.
Broadly speaking, in estate planning there are two types of trusts: revocable and irrevocable. This post will address revocable trusts.
Revocable trusts are also known as living trusts. The short answer is that a revocable trust is a Will substitute. For the most part, after death the same things can be done with revocable trusts as can be done with Wills.
The real difference between a revocable trust and a Will is that to function properly, a revocable trust must actually own your assets (or be named as a beneficiary). In this sense, revocable trusts are like personal holding companies. A good analogy is thinking of a public company such as FedEx. FedEx owns planes and numerous other assets. FedEx has shareholders and a CEO named Fred Smith. During your lifetime, you are the CEO (or trustee) of your trust. You are also the founder (known as either grantor, trustor, or settlor) and the shareholder (or beneficiary).
What happens to FedEx if something happens to Fred Smith (besides the stock taking a nose dive)? Whether Fred becomes disabled or passes away FedEx elects a new CEO. This is how revocable trusts can escape probate. If your revocable trust is properly funded is no reason to go through probate. For a refresher on how assets pass at death, click here.
Lets contrast a revocable trust to what happens with a Will. The only assets that pass through your Will are those assets in your sole and separate name. Your name was on them and now you are gone. You can’t sign your name anymore. With respect to those assets, nobody is authorized to sell or distribute them unless and until your Will is admitted to probate and an executor is appointed by the court. In contrast, assets that are held in trust are controlled by the Trustee (regardless of who the trustee is). That was you, but now it is the successor that you named. No court approval required. A seamless transition.
Advantages. There are a number of benefits to having a revocable trust over a Will. First, as mentioned above, if the trust is properly funded, probate may be avoided. Second, revocable trusts can avoid not just one probate, but potentially multiple probate administrations. Multiple probates can (and do) happen where you own real estate in multiple states. Each state requires a separate probate action. This can get expensive very quickly. Finally, revocable trusts are excellent tools for managing assets during incapacity. There are other benefits, but these are far and away the primary considerations.
All that being said, probate is not necessarily a scary place. However, some significant costs can be avoided with trusts. Attorneys are likely still needed upon death to assist with asset transfers, but there are no court pleadings to file or court appearances to make. This generally results in an overall lower cost.
Disadvantages. There are really two primary disadvantages to revocable trusts: cost and upkeep. Revocable trusts cost more up front because they plan for more situations: you are living and well, you are living and disabled, you are deceased. A Will only plans for your death. It is also necessary to fund the trust with your assets. This can be a lot of work sometimes. Overall, taking into account costs at death, revocable trusts tend to be significantly cheaper. That being said, you’ll be dead. You won’t be picking up the probate bill.
Another consideration is that revocable trusts must be kept funded. A Will controls the property you own at death. A trust only controls the property it owns. That means you have to keep your assets in it. As you acquire more assets, you must remember to put them in your trust. For instance, if you opened a bank account in your own name after you previously completely funded your revocable trust, you may have unwittingly re-subjected your estate to probate.
It should be noted that there may be reasons that a probate administration may still be a good idea or may be required. This would depend on a number of factors including the applicable state law.
In short, revocable trusts are not for everyone. You should consult with an estate planning attorney to discern if a revocable trust is right for you.