The Truth About Living Trusts

Within the estate planning community, there seems to be no greater controversy than that over revocable living trusts, and especially in Washington State.? Some advisors think everyone should have one, and some advisors think they are a waste of time, effort and money.? In this blog post, I?m going to explore living trusts; what they are, how they work, and what are the pro?s and con?s of using one for your estate planning.

What is a Living Trust?

In order to determine whether you need a living trust in your planning, you first need to understand what they are, and how they work.? A living trust is just one kind of trust.? There many different kinds of trusts, and each can be compared to a tool in a carpenter?s toolbox.? All trusts, however, have certain things in common, which would be a good place to start.

Think of a trust as a container for assets.? Someone needs to hold title to assets in order to own them.? A trust is a legal arrangement in which there is a Trustee, who holds legal title to assets in the trust, and follows the instructions that are given to the trustee in the trust agreement.? In addition to the Trustee, there are two other parties associated with a trust.? The first is the Trustmaker (also called a grantor, or trustor).? This is the person who creates the trust.? The other party is the beneficiary, who receives the benefit of the assets in trust.? What kind of benefit the beneficiary receives, and what responsibilities the Trustee has, come from the trust agreement, a written document, created by the Trustmaker.

Trusts can be irrevocable? or revocable.? Irrevocable trusts are generally used for a very specific purpose, such as holding assets to protect beneficiaries, or for charities, or to move assets out of the Trustmaker?s estate for estate tax or elder law purposes.? For the most part, irrevocable trusts cannot be changed once they are created, and with most irrevocable trusts, the Trustmaker can?t be Trustee or receive benefit (like everything in law, there are exceptions).? Revocable trusts, on the other hand, can be changed, and the Trustmaker can receive benefit.? Because of this, living trusts are used differently than irrevocable trusts, and are much more common.

While there are different kinds of living trusts, the most common living trust is used as a substitute for wills.? Generally speaking when you create a revocable living trust, you are doing it for three reasons. The first reason is to avoid probate.? The second reason is to provide incapacity protection. The third reason is to force yourself to organize all of your assets into one container.

What?s The Difference Between A Living Trust and a Will?

Because living trusts are generally considered will substitutes, it is important to understand how wills work.? A will is a written statement, outlining your desires for certain things to happen at your death, such as who your beneficiaries are, how they are to receive your assets, and who will be in charge of administrating your estate when you are gone.? Additionally, if you have minor children, the will is the instrument in which you nominate guardians for your children in case you die before the children become adults.

What?s Wrong with Wills?

Truthfully, there is nothing wrong with wills.? They have been used successfully for hundreds of years to pass assets to beneficiaries.? The criticisms of wills are mostly surrounding probate.? If you have a will, and your will controls any property, then when you pass away, there is a probate on your estate in order to transfer title of your assets to your heirs.? In some states, probate can be costly (attorney fees and executor fees, along with court costs and other fees) and can be very bureaucratic (lots of forms to file and court appearances to make) and can take quite a long time to complete the administration of the estate (the common word on the street is the average time in probate is 1 ? years).

So What is Probate?

Simply put, probate is the court process of transferring title of your assets to your heirs.? Financial companies and title companies need some sort of legal process to transfer ownership of your assets when you die.? Probate is the process to insure that happens.? Probate also provides and orderly process for paying your creditors, making sure the executor (in Washington we call them the Personal Representative) is doing their job, and also a process for beneficiaries to know and understand what is happening in the settlement of your estate.

Before you decide that you need to avoid probate, however, you need to understand that different states have different laws regarding probate.? There are a number of states (Washington State is included) that have streamlined probate rules, so that probate is generally less bureaucratic that other states.? There are states that have very cumbersome and expensive probate systems (California gets a really bad rap for their system).

So How Do You Decide if You Should Avoid Probate?

Although there is no science to this, here are what I consider to be the best reasons to want to avoid probate:

1. You have real estate in other states.? If you have real estate in other states, there will likely be a probate in every state where there is real estate.? This can be costly and time consuming.
2. You have stinky relatives.? In a situation where you know there is going to be extreme conflict over the administration of your estate, avoiding probate can save lots of attorney?s fees and grief.? If you?re disinheriting a child, or your children hate each other, avoiding probate can be a good thing.
3. If you live in a state with one of those horrible probate systems.? Talk to a lawyer in your state to see what probate is like.
4. If you have an extremely complex estate.? If you have a very large estate, or complicated assets such as business interests, mineral rights, partnerships, complicated investments, avoiding probate may be the thing for you.
5. You want privacy.? In most states, probate is a very public process.? That?s how we know what Elvis Presley had in his estate, and that Natalie Wood had 29 fur coats.? Your affairs become public in a probate, and your will is on file for anyone to see.
6. You want to be sure that if you become incapacitated, there is a smooth process for managing your assets for you, without a guardianship.? For me, this is one of the most compelling reasons to avoid probate.? With a will, if you become incapacitated, you have to rely on a Durable Power of Attorney, which has several short-comings.? Very often, if you start doing things with your assets that is not in your best interest because you are incapacitated, then someone has to stop you from doing that.? A guardianship is the process for that, and it is definitely a process you want to avoid if you can.

So What Do Living Trusts Do For You?

When people set up living trusts, they do so with the intention of avoiding probate.? Why do living trusts help with that?? Remember, probate is the process of transferring title of your assets to your heirs.? With a living trust, you set up a trust now, transfer those assets that would have to go through probate into the trust, and then when you die, there?s no need for probate on those assets, because you have already transferred title.? Your trustee simply follows the instructions you have left in the trust agreement, and is not required to file for, or go through the probate process for assets that are titled in the trust. In that way, living trusts help to avoid probate.

How Do Living Trusts Work?

Remember, earlier in this article I said that all trusts have some common characteristics.? The first is a Trustmaker, the creator of the trust.? The second is the Trustee, who has legal title to the assets, and who has to follow the instructions in the trust instrument, and third, is the beneficiary, who receives the benefit of the trust.? With a typical living trust, while you are alive and have capacity, you are all three of those people.? You make the trust, you manage the trust as trustee, and you receive the benefit of the trust.? Also typical, you can change the trust (amend it) any time you like, as long as you have capacity to do so.? In the trust instrument, you are given free rein to do anything you please with the trust assets while you are alive and have capacity.? You name a ?successor? trustee, who takes over if you become incapacitated or die, and when you die, your trustee follows the trust instrument, pays your creditors, files your tax returns, and transfers your assets to your beneficiaries, without the need for probate.

So If Trusts Are So Cool, Why Doesn?t Everyone Have One?

There are some downsides to trusts that are important to know:

1. Trusts only avoid probate for assets that are in the trust.? Many people have trusts drafted and then never transfer title of assets into the trust.? If it isn?t in the trust (or doesn?t pass by beneficiary designation or by operation of law) then there?s the potential for a probate, even if you have a trust.? Consequently, your assets need to be transferred into the trust, and once you have the trust, you have to remember you have the trust, so that any time you open a new financial account or purchase something that would go through probate, you put title in your trust.
2. Trusts are a hassle to set up. Remember, that when you set up a living trust, not only does the trust agreement have to be drafted, but all of your assets that are subject to probate have to be re-titled in the name of your trust.? That means all real estate must be deeded, business interests transferred, financial accounts re-titled, beneficiary designations changed, and so on.? That?s a lot of work!
3. Trusts are very long and complicated.? Because you are opting out of the statutory system, in order to a trust to operate properly, they end up being very long, very intimidating documents.? Many people are overwhelmed by how complicated the language in a trust is.
4. Trusts are expensive.? Usually, when an attorney drafts a trust, the legal fees for establishing the trust are several thousand dollars, and can go up even more if you have lots of assets and real estate the need to be transferred into the trust.? As such, whether you want to get a trust or not is a matter of doing a cost-benefit analysis.? If you have a simple estate, and probate won?t be a big deal, often going the will route is the right choice.

As I mentioned when I started this article, if you think of a living trust as a tool in your estate planning toolbox, you need to determine if it?s the right tool for you, based upon the circumstances and goals in your estate planning. One of the benefits of seeing the advice of a qualified estate planning attorney is that they can help you think through the pro?s and con?s of living trusts, and help you to come to a decision, based upon all of those factors, whether a living trust is the right tool for you.? There is no ?right? or ?wrong? when it comes to a living trust.? Ultimately, it?s about how you feel, based upon your own family, economic, and personal estate planning goals.

Source: http://markalbertson.com/truth-living-trusts-at-perspective-2/?utm_source=rss&utm_medium=rss&utm_campaign=truth-living-trusts-at-perspective-2

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