Visit any area with a lot of older Americans, and you’ll see plenty of ads for free seminars on Living Trusts by lawyers and financial professionals. Recently, the seminars even sprouted up in my area and seem to be spreading.
There aren’t too many lawyers who will go to the trouble of presenting a free two-hour seminar on living trusts to end up telling you the trusts aren’t for you. So let’s try to take an objective look at living trusts, their advantages and disadvantages, and who should use them.
A living trust technically is any trust created during your lifetime, as opposed to a testamentary trust created in your will. The traditional Latin legal term is inter vivos trust.
When lawyers and others use the term they usually mean a revocable living trust. That is a trust created during your lifetime and which you have the right to change or revoke at any time. Usually, you are the creator, trustee, and initial beneficiary. The living trust is designed to hold most of your property, including your home and its contents, cars, investments, and other valuables.
A living trust basically is a will substitute. Its main goal is to avoid probate. Only after a will has gone through the probate, or proving, process in the local court can debts be paid and assets distributed to the heirs. Avoiding this delay is one reason to bypass probate. Another reason is the cost. In addition to probate court fees and other expenses, lawyers usually are involved. Traditionally, lawyers charge a percentage of the estate for probate work, regardless of the amount of work done.
A living trust bypasses this process. After your death, a successor trustee automatically takes over according to terms spelled out in the trust agreement. The new trustee follows your written directions regarding management and distribution of the assets. The probate court is not involved.
There are other advantages of living trusts. Should you become disabled and need help managing your assets, the trust can be written so that a successor trustee automatically manages the assets until you are able. This is faster and easier than having your loved ones ask a court to name a guardian.
Another advantage is privacy. A will and all probate records are public. But a living trust doesn’t have to be filed anywhere. Many celebrities and wealthy people use living trusts for the major portion of their assets to keep their financial matters private.
Living trusts also are more difficult to contest than a will. While will contests are rare, there are well-established rules for challenging wills and clear paths to victory. There are far fewer cases in which a trust is successfully overturned, and fewer grounds on which to win.
But there are disadvantages to living trusts and reasons why they are not for everybody.
One reason to eschew a living trust is that you might not need to avoid probate. In many states, probate has been reformed in the last couple of decades, especially for estates of $2 million or less. The process is shortened and simpler, and the fee schedules for lawyers are abolished. The streamlined process is designed to have the estate cleared up by the nine-month deadline for filing an estate tax return. In addition, lawyers often can be found to handle the probate process for an hourly fee instead of a percentage of the estate. California generally sticks by the old probate rules, making a living trust worth considering. But in many other states probate isn’t the wealth killer it used to be.
Keep in mind that insurance policies, annuities, and retirement accounts all bypass the probate process on their own, as does jointly-owned property.
Living trusts also are more complicated than many people realize. The trust itself is a fairly simple, standard document, usually six to 10 pages long. But for the trust to be effective, you have to transfer title to all your assets to the trust. That means changing title to your autos and home. You also have to change the name and ownership of all your financial accounts. This generally involves sending copies of the trust to the financial institutions and completing additional paperwork required by the firms.
Many living trusts fail to achieve their goals because the retitling of assets never occurs.
A living trust also can get complicated after your death. Then, the successor trustee (usually your spouse) has to establish his or her bona fides with the various financial institutions so that the assets can be managed and distributed. I’ve heard surviving spouses say that this process was so difficult that they advise against living trusts solely for this reason. How difficult this process will be depends on the assets held by your estate and how much work you do in advance.
The revocable living trust does not save income or estate taxes. During your lifetime, you’ll be taxed on all trust income as though it were earned directly by you. At your death, all property owned by the trust will be included on your estate’s tax return. To avoid estate taxes, the trust needs to be irrevocable, and you cannot be trustee or a beneficiary.
You still need a will, even if you have a living trust. A trust can’t be expected to cover all your assets, so you need a will for assets that aren’t owned by the trust or that fall through the cracks.