Many Estate Planning advisors recommend revocable Living Trusts to their clients. Often simply called living trusts, the tool has been around for centuries. Despite its longevity, many people don’t realize the many advantages of using living trusts in their estate plans. Usually living trusts are recommended as a way to avoid probate, and they are one of the best ways to do that. But a living trust can help achieve other goals.
A trust is a contract between the creator, or settlor, of the trust and the trustee. The trustee manages the assets for the benefit of the beneficiaries. You (or you and your spouse) can be all three parties: settlor, trustee and beneficiary. That’s usually the case with a revocable living trust. You transfer legal title of your assets to the trust and manage them as trustee instead of as an individual.
You can change the trust at any time, which is why it’s called revocable. You can even terminate it and take back legal title to your assets. There are no income or estate tax benefits to a revocable living trust. To obtain tax benefits, a trust must be irrevocable. Revocable living trusts are popular because of their many non-tax benefits.
Probate can be a long, expensive process in many states. Probate also puts your net worth and how you divided your estate into the public record. For those reasons, many people want to avoid probate, and they use living trusts to do so. But in many states the probate process is reformed so that it is faster and less expensive than in the past, especially for middle-class estates. So, the cost of creating a living trust to avoid probate might not be worthwhile in those states if done solely for that reason.
Yet, there are other goals a living trust can accomplish. Consider these goals and determine if they are good reasons to transfer most of your assets to a living trust.
Protection from some effects of aging. An unfortunate fact of aging is that at some point many people need help managing their affairs. Physical and mental decline, especially as people reach their 80s, make it challenging to manage income and assets.
A durable financial power of attorney (POA) is the standard estate planning tool to handle the situation. The POA is important, and you should have one even if you decide to use a living trust. But consider some advantages to having most of your assets in a living trust instead of relying solely on a POA.
The POA is a black or white situation. Either the agent appointed under the POA is managing your assets or you are. There also can be delays as the agent decides whether or not it is time to step in and then asks third parties who hold your accounts to accept the change. The agent then has to get up to speed on your financial affairs.
A living trust can be more flexible than the POA. Of course, a successor trustee takes over when you aren’t able to manage your affairs. But before that point, you can name a co-trustee to help you manage the assets and make decisions. You still are in control, but there is someone helping you make decisions and learning the details of your assets.
The living trust also can have safeguards. Instead of one successor trustee, you can name co-trustees so that there are checks and balances. This can prevent a situation in which someone with a power of attorney depletes your accounts. A further safeguard available with trusts is the trust protector. This is a third party who monitors the actions of the trustees by receiving account statements and other information as needed. The trust protector has the legal authority to remove and replace the trustees when that’s deemed in your best interests. All that can be done without involving the courts.
Your living trust also can provide that when the successor trustee (or trustees) is managing the trust, the trustee is required to have the trust beneficiary (you) evaluated quarterly by an independent care manager. The care manager issues a report to the trust protector describing the care the beneficiary needs and is receiving. This helps ensure you aren’t deprived of care by a trustee who has other plans for your assets.
Identity theft protection. Seniors are frequent victims of identity theft and other forms of financial fraud and abuse. The key to preventing ID theft is safeguarding your key personal information, especially your Social Security number. Unfortunately, SSNs frequently are included in medical records. Medical records aren’t as well-protected as financial records and increasingly are a target of identity thieves.
An advantage of the living trust is that you can have it obtain its own taxpayer ID number. (However, a separate taxpayer ID number often isn’t required. See our July 2015 article.) This move can provide a layer of protection from ID thieves for assets that are in the living trust.
Helping other loved ones. Suppose there is someone depending on you for care or support. This person could be a special-needs child or an adult who needs assistance, such as a spouse or sibling. You probably have a provision in your will providing for the continuation of support. But what happens if you become disabled?
This is another situation in which a revocable living trust can provide a smooth transition. When you are alive but have reduced capacity, there’s no one to step in. The problem can be resolved if you set up a living trust with assets you intend to be used for the person’s care. Then, a co-trustee or successor trustee steps in to ensure that the care continues regardless of your situation.
Easier changes. Suppose you want to leave assets to your heirs in a trust. Perhaps you want someone else to manage the assets for them or want them to receive distributions over a period of years so that they won’t spend the inheritance quickly. You also might want the assets protected from creditors of your heirs.
One option is to use a testamentary trust. You own the assets personally during your lifetime. Your will creates a trust after your passing, and the assets are transferred to the trust. A downside of the testamentary trust is that it is created by the local probate court where you resided. The court then has to approve any changes, including moving the trust to another state.
Your heirs or the trustee might have good reasons to move the trust after your passing. They might live in a different state. Or another state might have lower income taxes on the trust or offer a higher level of creditor protection.
Instead, you can create a revocable living trust now. In your will, have assets transferred to the trusts upon your death or put the assets in the trust now. If you take this approach, it will be easier for the trustee to make appropriate changes than under a testamentary trust.
Divorce protection. You probably don’t want your assets to depart with an ex-spouse of one of your children if they divorce. The general rule in most states is that assets that are inherited or received as gifts are not marital property subject to division in a divorce. But those assets can become commingled with other assets and become part of the marital estate, or the other spouse can be litigious about the issue and force a settlement that divides the assets.
One way to minimize that problem is to create a separate revocable living trust for the benefit of each child or grandchild. The beneficiary also can be trustee if you want. Instead of giving assets directly to them, you transfer the assets to the trust. Since the assets are owned by the trust, they are less likely to be included in the marital property.