Many believe that living trusts are only for the wealthy. Not true! If you own a house, a small amount of stock, and have a 401(k), you might want to consider the benefits of setting up a living trust rather than a will. You may have opted for a will because you don’t understand what a living trust is and think it is not for you. Well, here is some information that may change your mind.
What Is a Living Trust?
You set up a living trust while you are still alive. At this point it is called a “Revocable Trust” because you can change or “revoke” it at any time while you are still alive.
You give someone else (a trustee) the authority to hold all of the property that you put into that trust for another person or persons. These people are called beneficiaries.
The key here is that you can name yourself as the trustee for as long as you are alive, and then name a successor trustee who is to take over after you die and distribute all of the property according to the terms of the trust. Once you die the trust becomes “irrevocable,” meaning that the terms and conditions cannot be changed. The successor must carry out your directives in the trust.
So, Why Would You Want a Trust Rather Than a Will?
There are a number of benefits of having a living trust:
1. You avoid probate. When there is a will, it usually goes to probate court, for distribution of assets to happen. You can count on about 5 percent of those assets being eaten up in lawyer’s fees and court costs. A living trust does not have to go to probate. Assets are simply distributed as you have designated.
2. You can set up a plan for the potential that you become incapacitated. In your trust, you can name that successor trustee to also take over when you are incapable of continuing to manage your own trust. A will only comes into effect if you die.
3. You have complete control over what happens to your property after you die. It is almost impossible for anyone to dispute the terms of a trust as they may be able to do with a will.
4. You can set up a trust for any estate size at all.
5. You can designate specific items to go to specific people, just as you could do in a will.
6. You can keep your financial affairs completely private. Because a will must be probated, it is public information once the probate documents are filed. There are no court filings for a trust, so it all remains private.
7. You can control distribution limits. If your trust is quite large, you can provide for limits on withdrawals from that trust on the part of the beneficiaries, should you want to keep principle for future generations (e.g. grandchildren). This is also especially important if you have a handicapped child and you want to set aside a monthly or annual amount, so that there will be funds available for that child’s care during his/her lifetime.
This All Looks Good — What Are the Drawbacks?
Yes, there are probably a few other things to think about.
1. You cannot provide for the care of minor children with a trust. So, at least until those children reach maturity, you will need a will to designate guardians, if nothing else.
2. They need to be updated. Anything that you accumulate after your trust has been established will not be a part of that trust, unless you “assign” it to that trust, and of course, that requires another document for each asset or item. In this case you may want to have a will attached to your trust to take care of these items.
3. You need help to set one up. If you prepare you own living trust, you may make mistakes, and these can impact what you may do during your lifetime, with assets in that trust.
Setting Up a Living Trust
You essentially have two options for getting this done:
1. You can go to an attorney who specializes in wills and trusts and have it set up. This professional will have substantial experience and will do it perfectly. He will also charge you about $2,000 if it is a basic trust with no complex complications. The more complex, the more it will cost.
2. You can set a living trust up yourself. And you can thank technology and the Internet for making this possible. There are numerous legal websites to which you can go and simply search for “living trust.” You will then be able to pay a small fee and get all of the documents you need with explanations. And, if you have questions, you can contact a lawyer “on call” and get your answers. Using a profession service like this can help alleviate the issues that could occur if you set up the trust completely on your own.
Doing It Yourself
You will find that there are four parts to a living trust, not counting the accompanying will, if you should decide to have one. Briefly, they are as follows:
1. The Declaration of Trust. This is the lengthiest document of the package and has several parts. A lot of this is fill in the blanks, so, with good explanations from the purchased documents or the software, you should not have difficulty.
A. You name yourself (or you and your spouse) as the makers of the trust.
B. You must then name the trustee(s) of the trust. In most cases you will name yourself, so that you continue to have complete control of it while you are alive. You will also name a successor trustee to take over when you die or if you become incapacitated. (Remember, you want a really trusted individual here, because if should you become incapacitated that individual will be able to make changes — the trust is not irrevocable until you die. Some people name banks or trust companies or their attorneys)
C. You can name the person who is to be in charge of making medical decisions should you become incapacitated.
D. Provide a listing of your property (real and personal) and the individuals who are to be the beneficiaries of that property. Here you can also name specific items (e.g., a piece of jewelry or a painting). Typically, the property listed is real estate, investments, bank accounts, etc.
2. The Certificate of Trust. This is a relatively short document, naming the trustee and successor trustee again and listing the powers of the trustee.
3. Bill of Transfer. This is where it gets a bit tedious. There are forms to complete for each asset that you intend to place in the trust. You must transfer each asset to the trustee (right now, probably yourself), but it must be done.
4. Transfer of Property. This specific form is for real estate, and is composed basically of a Quit Claim Deed, in which you transfer ownership of the property for you as an individual to you as the trustee. You can also put a TOD (transfer on death) in this quit claim deed, so that the deed automatically goes to your beneficiary. Remember, this document must be filed with the Recorder of Deeds for your county, so the title is clean when you die.
5. A Will. This is for other items you wish to bequeath to someone (tools to your brother; fine china to your sister, etc.) You can change this will, but each time it must notarized again.
A Few Side Notes
Some people think that a living will is a method of avoiding taxes. No, it is not. Whatever income is produced by your investments that are sitting in that trust is still taxable, and you must pay those taxes. When you die, the general practice is for the successor trustee to get a federal EIN for the trust and pay any taxes that are due. And once the assets in the trust are distributed, the trust expires, along with its EIN number. There will not be federal inheritance taxes on the assets in the trust when they are distributed to beneficiaries, unless an individual beneficiary will be inheriting more than $5.34 million. State inheritance tax law varies, so you may want to check it out, but it will not impact your trust at all.
Your trust does not protect your estate from creditors, and in most cases, the included will, if there is one, will provide that creditors are to be paid off. And creditors can still file a claim against your estate. However, because your trust is a private document, the only public information regarding your assets is real property for which there are recorded deeds. But creditors can lay claim to a part of that property.
There will also be administrative expenses if you have named an attorney or a bank as either a trustee or successor trustee. These will be paid from the trust.
A living will that you set up in one state is valid in all 50 states, so if you move, you do not have to set up a new trust.
Setting up your own living trust is no longer a difficult matter. And, if you have any specific questions, you can always pay a small fee to an attorney to answer them.