Maximize the Power of the Living Trust

Each year, I become more impressed by the importance of having a living trust as a key element of an estate plan and of properly setting up the trust.

A living trust has two significant benefits. The first benefit is that assets owned by the trust avoid probate. Probate is a process under state law that ensures the deceased’s debts are paid and that legal title to his or her assets pass to the appropriate people.

Avoiding probate should reduce the cost of settling your estate and speed the transfer of assets to the beneficiaries you want to have them. Some states have low-cost and easy probate processes for less valuable estates.

But many still don’t, or the cut off for the simplified process often is less than a typical middle-class estate. Even when a state has a simplified pro- bate process, that process can be burden- some or inconvenient when the executor or administrator lives in a different state. For many estates, avoiding probate or minimizing the assets that go through probate is an important goal.

The second benefit is that the living trust helps to protect your assets and to ensure they are managed if there is a time when you aren’t able to do so.  Of course, you should have a power of attorney naming one or more people to handle your affairs when you can’t.

But, as I’ve written in the past, many financial services companies require a lot of hoops to be jumped through before they’ll accept a power of attorney. A living trust properly set up can result in a better process.

Living trusts potentially have other benefits, but those are the main ones. The bottom line is that a living trust is likely to make life easier for you and your heirs, as well as protect your assets. But the trust must be set up and managed correctly. Otherwise, the benefits are lost and the cost of having the trust drafted is wasted. The full name is the revocable living trust.

It is a contract between a creator or grantor, trustee and beneficiary. More than one person can be in each of these roles, and the same person or people can have more than one role or all three roles. In the standard revocable living trust, you, or you and your spouse, initially serve jointly in all three roles. You create the trust and serve as the initial trustees and beneficiaries. You also name successor trustees and beneficiaries (and can change your mind later by amending the trust agreement). U

nder state law, assets owned by a living trust avoid probate. Legal title passes to the beneficiaries as directed under the trust agreement. That’s why a living trust often is called a substitute for a will. Even when you have a living trust, you still should have a will.

You’re likely to own some assets that aren’t held by the living trust and will have to go through probate. In addition, other issues could arise that require someone to be authorized by the probate court to act on behalf of your estate. Also, in a will, you can appoint guardians for minor children and take other non-financial actions. So, have a will as a backup.

A common mistake is to have a living trust drafted but fail to fully implement it. Assets avoid probate only when the living trust has legal title to them. With many assets, you must go through the formal process of having the title changed from you as an individual to you as trustee.

That means contacting financial institutions and having them transfer ownership of all accounts (other than retirement accounts) to the trust. Car and other vehicle registrations should be changed. You might need to change the deeds to your home and any other real estate.

Personal property usually is transferred with a simple appendix to the trust that says ownership of all personal property is transferred to the trust. To ensure a smooth transition of asset management should you become incapacitated, you need to take several steps in advance. Name your successor trustee or trustees in the trust document. Be sure the successors know they are named and are willing to accept the responsibility.

The successor trustees should have copies of the trust agreement plus all the essential information about the assets you want them to manage.

Of course, the financial services companies you deal with should have copies of the trust agreement and whatever other documents or information they require to authorize transactions from the successor trustees. Many require their own forms to be filed or impose other steps before they’ll accept a successor trustee.

When drafting the trust document, pay attention to the conditions under which authority transfers to the successor trustees. Often, the trust agreement indicates that in the event of a disability, two doctors must certify that the initial trustee isn’t able to perform the duties of managing the trust. That condition is to protect the initial trustee from being taken advantage of in his or her later years.

But it also can slow the transition of management of the assets. An alternative is to name your preferred successors as co-trustees from the outset instead of as successor trustees.

That gets them involved in the management process right away and makes the financial services companies familiar with them. But you’d have to have a great deal of trust in the individual or individuals named to do this. The more work you do when the trust is created, the more benefits you and your heirs will receive from the trust.