Living Trusts: Fact vs. Fiction

Many myths surround these popular estate planning tools.
Living trusts are created with a clearly
defined objective: to avoid probate. Misconceptions about living trusts have
spread to the point where people think they can accomplish much more than they
really do. Here is a realistic assessment of living trusts.
If you fear probate, consider a living trust. If you worry about your will being contested or
your heirs fighting over your assets, a revocable living trust may be your best
option.

You fund a revocable living trust with
all, or largely all, of your assets during your lifetime. The trust owns the
assets, yet you can still use these assets while you live. Once you die, the
revocable living trust becomes irrevocable and the trust assets are distributed
according to your wishes by designated successor trustees, exempt from probate.1,2,3

In addition to giving you more control and
privacy, a living trust may save your heirs time and money. An AARP survey
finds that it takes roughly 18 months to distribute the typical estate because
of probate. Settlement costs from probate may eat up as much as 5% of an
estate.1,2
Living trusts do not reduce taxes. Assets within a living trust are fully taxable at the federal and (generally)
state level. Unless someone has drafted the trust to include tax-saving
provisions, it will offer no particular estate or income tax advantages to the
grantor or the beneficiaries.4
Living trusts lead to a lot of paperwork. As
the trust has to become the legal owner of your assets to be effective, the
title needs to be changed on those assets. That means filling out myriad forms and
revising others. Expenses may be incurred along the way.4

Living trusts do not relieve trustees of their duties. When a grantor of a living trust passes away,
the language in the trust document will not magically “do all the work” for the
successor trustee. While a successor trustee will usually not have to deal with
probate, other responsibilities remain. Titles will need to be changed and appraisals
may be necessary.5
A living trust is not necessarily inexpensive. A lawyer may charge you $1,500 or more to create
one. If you have significant assets
and fear a dispute over your will, it may be worth it.2,6

There are living trust solutions available
on the Internet, or via books or software. However, when cutting and pasting
boilerplate language and filling in some names here and there, what kinds of legal
and financial risks are you taking?6
While having a living trust drawn up with
the help of an attorney is certainly advisable, paying a fee is no guarantee of
competence; amending simple errors could cost you another $300-500.7
A living trust is not a will. You still need a will when you have a living trust.
In fact, you are probably going to need a “pour-over” will down the road, assuming
you will keep accumulating assets after the trust is drawn up. A pour-over will
place these stray assets into the trust.4

Additionally, you need a will if you want to make charitable bequests
or gifts to friends or relatives upon your passing. A living trust cannot carry
out these gifts on your behalf, nor can it name a guardian for any minor
children.4

A living trust is not a living will, either. A living trust does not
function as a health care directive or a power of attorney. These are separate
estate planning documents. While some families ask attorneys to create them concurrently
with a living trust, a living trust won’t stand in for them.8

While living trusts are highly touted and can be highly useful, that
does not mean every family should get one.

You may not need a living trust to begin with. If your financial life has been
largely free of “creditors and predators” and your estate isn’t complex, a
thoughtfully drafted, well-executed will could prove sufficient when the time
comes. For some middle-class families, a living trust can be like a fifth wheel
on a car, seeming to provide stability, but actually unnecessary.
After all, not all assets are subject to probate when someone passes
away: IRA, Keogh and pension plan savings, life insurance death benefits,
checking and savings accounts that have POD beneficiaries, Treasury bonds, and property
owned jointly with the right of
survivorship.4
In terms of time, often there isn’t much difference between
distributing assets via probate and through a living trust. In terms of
savings, the filing and court fees that come with a probated will may not be
that onerous. While the fees may total a small percentage of the value of the
estate, the executor may decline a commission if he or she is a family member
and require only hourly legal advice.
A living trust isn’t the only type of trust out there. Some families opt for the testamentary
trust. Assets move into this basic, irrevocable trust as directed in a
grantor’s will. As the grantor’s will directs the assets, the estate still
proceeds through probate but more expediently than usual. Other families opt
for more complex and specialized trusts.2
As a reminder, this article is intended as an overview of living trusts, and not any
kind of legal advice. If you are considering a living trust or another kind of
estate planning vehicle, the best “first step” is to talk to an attorney before
you proceed further.

Reeve Conover can be reached at 877-423-9990 or Reeve@ReeveWillKnow.com

 

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Citations.

1 – www.foxbusiness.com/personal-finance/2013/04/01/trust-me-what-need-to-know-about-trusts/
[4/1/13]

2 – www.fool.com/personal-finance/taxes/the-truth-about-living-trusts.aspx
[4/4/13]

3 – blog.nolo.com/estateplanning/2011/08/24/trusts-revocable-v-irrevocable/
[8/24/11]

4 – www.kiplinger.com/article/retirement/T021-C000-S001-four-facts-of-living-trusts.html#iwrC4LSHbmjf9emt.99
[4/4/13]

5 – elderlaw.sonomaportal.com/2013/02/07/the-living-trust-myth/
[2/7/13]

6 – www.nolo.com/legal-encyclopedia/making-living-trust-yourself-29736.html
[4/4/13]

7 – www.sacbee.com/2013/03/27/5295509/ask-the-experts-are-there-low.html
[3/27/13]

8 – www.axa-equitable.com/plan/estate/living-will-vs-trust.html
[12/09]