There are other advantages to a living trust. For example, if you own property in more than one state, on your death, probate proceedings may need to take place in each state where property is located. These are usually referred to as "ancillary probate." Clearly, when property is held in a living trust, these ancillary proceedings may not be necessary.

Another advantage is privacy. Probate is a matter of public record, whereas living trusts are private. Some individuals may not want to disclose who their ultimate beneficiaries will be, and the living trust provides a modicum of privacy.

However, there are also pitfalls in the use of the living trust.

Although I have indicated that for ownership purposes, the trustee -- and not the grantor -- is the legal title owner of the property, for tax purposes, the property in a trust remains the property of the grantor. Contrary to popular opinion, living trusts do not save estate taxes, and they do not save income taxes. No matter how many times this is said, some people either do not hear it or do not believe it.

There are also increased costs as a result of the creation of such a living trust. You have indicated that your attorney wants to charge you $2,500 for his/her legal services. Furthermore, you will have to incur administrative and recording costs. The paperwork that the trust has to handle may be as great a burden as having to go through the probate proceedings.

More importantly, even if you set up a living trust, you must still have a Will. Most people own more than their house, and especially if there are children involved, or other assets, it is imperative to have a Will (referred to as a pour-over Will) to make clear your intentions as to how the rest of your property will be disposed of on your death. With a Will, even if there is a cumbersome probate proceeding, at least your intentions have been made known; without a Will, the intestacy laws in the state where you were domiciled on the date of your death will determine who will receive your assets.

Living trusts are an option to be considered. However, you should do a complete asset check to determine how serious your estate will be impacted by the probate proceedings. For example, other assets may already be probate proof, such as life insurance proceeds, IRAs, or other retirement benefits.

Everyone must consult his or her tax and financial advisors before taking any action that could be costly to you and to your heirs.

Once you have decided to go forward with the living trust, you should consult several attorneys who specialize in Estate planning. Compare their fees. The $2,500 fee may or may not be realistic or competitive. Lawyers do not always charge on an hourly basis; some bill on a product basis – so much for a Will, so much for a real estate settlement, and so much for an uncontested divorce.

Should you prepare the papers yourself? That certainly is a possibility, and there are a number of good “do it yourself” books on the subject of the Living Trust. It does not take a rocket scientist to prepare the Trust documents. However, there is always a risk that you may have missed a legal technicality, and as a result, your Trust may be declared invalid.

As the old saying goes, “you get what you pay for”!

Now let’s turn to the other option, namely adding your relative to title as a joint tenant with right of survivorship. When title is held as “joint tenant”, upon the death of one tenant, the other tenant automatically will own the property. You are correct; probate is not necessary in order to give the property to your relative.

But, there is a major downside to this. Let us assume that you purchased the property many years ago for $50,000 and it is now worth $500,000. If you add your relative to the title, in effect you are giving him a gift of half of the property. Thus, there may be gift tax complications for you (not for him) and you have to discuss this with your tax advisor.

More significantly, however, the tax basis of the donor becomes the tax basis of the donee. In our example, your basis (assuming no improvements to the property) is $50,000. When you give half of the property to your relative, his basis will be $25,000. Let us further assume that on your death, the property is worth $600,000. Your relative’s basis will thus be $325,000 (his basis of $25,000 plus half of the value of the property on the date of death, i.e. $300,000). This is known as the stepped up basis. Should your relative sell the property for $600,000, for tax purposes he will have made a profit of $275,000. Unless he has lived in the property for at least two years out of five years before the date of the sale, he will have to pay capital gains tax on all of this “profit”.

There is yet a third alternative; prepare a Will and have the house go to your relative through the Will. Yes, he will have to go to Probate. But his basis in the property will be $600,000 (the value on the date of death), and should he sell the property immediately for that price, he will made no taxable gain and thus will not have to pay any capital gains tax.

This is obviously complicated. You want to be generous, but you don’t want to put an unnecessary financial burden on your relative. Talk to your financial advisors before you do anything.

There is an old adage “Don’t look a gift horse in the mouth”. That may be true, but to the Citizens of Troy – and to the IRS – you have to be cautious.