Living trusts are created with a clearly defined objective: to avoid probate. Unfortunately, misconceptions about living trusts have spread to the point where people think they can accomplish much more than they can.
If you fear probate, consider a revocable living trust. If you worry about your will being contested or your heirs fighting over your assets, it may be an excellent idea.
You fund a revocable living trust during your lifetime with all or most of your assets. The trust owns the assets; yet, you are the trustee, meaning that you can still use those assets while you are alive. Once you die, the revocable living trust becomes irrevocable, and the trust assets are distributed per your instructions by designated successor trustees. Assets distributed out of the trust are exempt from probate.1
In addition to giving you more control and privacy, a living trust may save your heirs time and money. Probate is often lengthy, and the legal costs may eat up 3-4% of a larger estate.2
Revocable living trusts do not reduce estate taxes. Assets within a revocable living trust are fully taxable when they are transferred to heirs. Unless someone drafts a common living trust to include tax-saving provisions, it will offer no estate or income tax advantages to the grantor or beneficiaries.3
Living trusts can lead to a lot of paperwork. A trust must legally own assets to be effective, so that may mean retitling certain assets and revising bank account and brokerage account forms and other relevant documents.1
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. Many responsibilities can remain for a trustee after a grantor’s death.
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, the effort may be well worth the cost.1
There are living trust solutions available on the Internet and 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?
Also, while having a living trust drawn up with the help of an attorney is certainly advisable, attorneys are human, and sometimes, errors are made. Amending a mistake could cost you further legal fees.
A living trust is not a will. You still need a will when you have a living trust. In fact, you will probably keep accumulating assets after the living trust is drawn up, and as those assets may be outside of the trust, a will should be in place to guide their distribution after your death. A will can legally appoint guardians for minor children; a trust cannot.1
A living trust is not a living will, either. It cannot function as a health care directive. Some families ask attorneys to create a health care directive concurrently with a living trust, but the two should not be confused.4
You may not need a living trust in the first place. If your financial life has been largely free of “creditors and predators” and you have a simple estate, a thoughtfully drafted, well-executed will could prove sufficient. After all, assets such as IRAs and workplace retirement plan accounts are generally exempt from probate when the IRA owner or plan participant dies.5
In terms of time, there is sometimes little 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 requires only hourly legal advice.
As a reminder, this article is intended as an overview of living trusts and should not be relied upon for 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 proceeding.
1 – fool.com/investing/2016/09/10/is-a-revocable-living-trust-right-for-you.aspx [9/10/16]
2 – info.legalzoom.com/much-cost-probate-will-3816.html [3/27/17]
3 – nolo.com/legal-encyclopedia/question-living-trust-avoid-estate-taxes-28122.html [3/27/17]
4 – nolo.com/legal-encyclopedia/living-will-power-attorney-advance-directive-30023.html [3/27/17]
5 – investopedia.com/articles/personal-finance/100616/do-retirement-accounts-go-through-probate.asp [10/6/16]
Where do things proceed from that point?
Every day, people die intestate. In legalese, that means without a will. This opens the door for the courts to decide what happens with their estates.
When no valid will exists, state intestacy laws dictate how assets are distributed. These laws divide an estate evenly (or equitably) among heirs. Any assets held in joint tenancy go to the joint owner. Assets held in a trust transfer to the trust beneficiaries (with spouses getting a share of those assets in some states). Community property goes to a spouse or partner in community property states.1
Simple, right? Unfortunately, the way assets transfer under these laws may not correspond to the wishes of the deceased person. Did the decedent want some of his or her estate to go to a charity or a person close to them? These laws will not allow that. State law will also decide who the executor of the estate is, since the decedent never named one.2
If the deceased person designated beneficiaries for his or her retirement accounts and life insurance policy, those retirement accounts and insurance proceeds should transfer to those beneficiaries without dispute, even when no will exists. When life insurance policies and retirement accounts lack designated beneficiaries, then those assets are lumped into the decedent’s estate and subject to intestacy laws.2
Most people have specific ideas about who should inherit what from their estates. To articulate those ideas, they should write a will – or better yet, they should draft one with the help of an attorney. Anyone who cares about the destiny of his or her wealth should take this basic estate planning step.
For a last will & testament to be valid, it must meet three important tests. It must be created by a person of sound mind. It must express that person’s free will – that is, it cannot be written or drafted under coercion or duress. Lastly, it must be signed and dated in the presence of two or more unrelated people who stand to inherit nothing from that person’s estate.1
Many wills are signed in the presence of notaries; although, a will does not have to be notarized to be legally valid. Some wills are self-proving – they have an attached, notarized affidavit, which acknowledges that all three tests noted in the preceding paragraph have been met. When this affidavit accompanies a will, there is no need to track down the parties who witnessed the signing and dating of the document years before.1
A last will and testament should be formatted and printed using a computer and printer; at the very least, it should be typed. Handwritten wills may not pass muster in some probate courts.1
When an individual dies intestate, the future of his or her estate is largely up to the courts. A basic, valid will stating his or her wishes may prevent that fate.
1 – legalzoom.com/knowledge/last-will/topic/wills-intestate [3/20/17]
2 – money.cnn.com/2016/04/28/pf/dying-without-a-will-prince/ [4/28/16]