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Living Trusts: Takin' Care of Business

A living trust, also known as a revocable trust, revocable living trust, or inter vivos trust, is a popular way to own property during life and transfer it at death. The living trust generally substitutes for a will or other traditional estate planning document. With a living trust, all assets, such as real estate, bank accounts and stock accounts are transferred to the trust and administered for the benefit of the trustmakers during their lifetime, and then transferred to the trust beneficiaries when the trust beneficiaries die. For those who want to take the time to take care of business and get their affairs in order before they die, as well as make things easier for their heirs, a living trust is a good tool.

The primary benefit of a living trust is that all assets held by a living trust avoid probate upon the death of the trustmaker. Here’s why: When someone dies, the reason a probate is needed is that the owner of all the estate property is no longer around to sign off on the titles to transfer the property to the heirs. The court has provided a mechanism, called probate, where a personal representative is appointed and empowered by the court to sign off on the property to transfer the titles to those named in a will as heirs.

With a properly drafted and funded living trust, a probate is unnecessary. The persons setting up a trust - usually called the settlors, grantors or trustmakers - are generally a married couple, although many single people also have living trusts. The trustmakers transfer all of their property to the trust while they are still alive, usually naming themselves as the initial trustees of the trust. Since the trustees of a trust call the shots over the assets, this means that the trustmakers don’t give up any of their power over their assets while they are alive. They can buy, sell, or give away whatever they want, just as they always have; they can even revoke the whole trust if they want to. The difference is that at their deaths, technically the property still has an owner - the living trust. In their trust, the trustmakers have named a successor trustee to step up to the plate and take over as trustee on their deaths. The trust document also says what is to happen with the assets at the death of the last trustmaker; usually, the successor trustee is to distribute the property to the beneficiaries named in the trust, sign off on the titles, and then the trust dissolves. Because the trust is the owner of the property at the death of the trustmakers, and the trust itself empowers the successor trustee to transfer titles, there is no need for a probate to appoint someone to sign off on the property to pass title. Pretty neat, huh?

A properly drafted living trust will also allow the trustmakers to function for each other if one of them becomes incompetent and unable function as trustee. If they are both incompetent, then the successor trustee is empowered to act as trustee in their place. A living trust, then, has an additional benefit over a traditional will - it can assist in the care and control over assets while the trustmakers are alive, not merely on their deaths. This avoids the need of a guardianship if a trustmaker becomes incompetent.

The benefits of a living trust are not only financial. A properly drafted living trust portfolio will also include living wills and medical powers of attorney to address the medical needs of the trustmakers while they are alive, again avoiding family disputes or court action regarding the physical care for the trustmakers while they are alive. Another advantage of a living trust is that it is completely private. In a probate proceeding, the will is filed with the court in a public proceeding, and anyone that wants to can snoop through the court file and see what’s going on. Since a living trust is not filed with the court, it is not accessible to the public

Another document that is part of a quality living trust portfolio is a pour-over will. While the purpose of a living trust is to avoid the need for a probate and a will, it’s a good idea to have a will as a backup just in case property is later purchased that the trustmakers don’t get titled in the name of the trust for whatever reason. This will is called a pour-over will, since it doesn’t say anything about who gets what; it merely says that any assets not in the trust should be treated as if it were in the trust. It therefore “pours over” into the trust, and omitted assets are treated as if they were trust assets. It’s a safety net for assets that don’t make it into the trust. Hopefully, it will never be used, since all assets will be owned by the trust, but better safe than sorry.

What are some disadvantages of a living trust? The first one is the up-front cost. A living trust cost more than a traditional will, both in terms of money and hassle. However, in the long run, a living trust is generally cheaper than a probate both hassle- and money-wise. But while you’re alive, it takes more money to draft a trust, and more hassle to transfer all of your assets to the trust. The question you have to ask yourself: Is it worth it to spend more money now to take care of business, or should I just wait and let my heirs worry about it? There’s no right answer. The other downside to a trust is what we call the “comfortability factor.” It takes a while to get comfortable with the idea that the trust owns all of your property, and sometimes banks and financial institutions have to be educated in terms of ownership of accounts and the powers of a trustee. Finally, without a probate, there is no cut-off date for creditors of the deceased to make claims against the estate as there would be with a probate. It is possible that creditors that were unknown at death may pop up later and try to go after estate assets.

One more thing: Taxes. For federal income tax purposes, as long as the trustmakers acts as the trustees of the trust, a living trust will generally be treated no differently than as if the trustmakers still owned the property outright. Likewise, a living trust will not save death taxes (state inheritance or federal estate) any better than can a properly prepared will.

Living trust aren’t for everybody. Sometimes, the costs of a living trust simply outweigh the benefits. Other times, a trust can be a real godsend. If you need more information or are considering a living trust, please contact us.

Caleb Morgan