Trusts and wills are two means of passing property upon your death. There are other purposes for trusts. This section discusses trusts and compares the use of a trust to the use of a will. In many cases, using a living trust can be advantageous, but caution should be exercised. In certain circumstances, using a trust may unnecessarily complicate your estate, and in some cases may actually be disadvantageous. Because this area of the law is complex, an attorney should always be consulted before making a decision as to whether a trust is right for you.
That being said, there are many benefits to the use of living trusts in estate planning. We frequently recommend them to clients who are in a position to realize the benefits of a living trust:
Living Trusts can help your estate avoid probate at death, including needless and expensive probate in multiple states if you own property in more than one state.
Living Trusts can be used to take maximum advantage of federal lifetime estate tax exemption, reducing and often eliminating estate taxes entirely.
Living Trusts are relatively inexpensive and quick and easy to set up. Our standard fee for a married couple that includes trusts for both spouses is less than you would expect, and we can complete work on your documents in a matter of days.
Living Trusts assure your intentions are followed through with, because trusts are difficult to contest and unintentional disinheriting (as can happen with joint tenancy property) is avoided. Also, your assets remain in the trust until you say they are to be distributed.
Living Trusts can provide for minors and other beneficiaries with special needs without the intervention of court proceedings.
Living Trusts have other benefits, such as quicker distribution, professional management where desired, and the peace of mind that your wishes will be fulfilled in distributing your assets after death.
I have a will. Why would I want a living trust?
A will may not be the best plan for you and your family, primarily because a will does not avoid probate when you die. To be effective, a will must go through a lengthy and expensive probate process. Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated.
Fortunately, there is a simple and proven alternative to a will–the revocable living trust. It lets you keep control of your assets while you are living and avoids the need for probate after your death. If you should become incapacitated, a living trust will provide for management of your assets until you recover.
What is probate?
Probate is the legal process through which the court sees that, after your death, your debts are paid and your assets are distributed according to your will. If you don’t have a valid will, your assets are distributed according to state law.
What’s so bad about probate?
Probate can be expensive. Legal/executor fees and other costs must be paid before your assets can be fully distributed to your heirs. Costs vary in each state, but are usually estimated at 3 to 8% of an estate’s value. If you own property in other states, your family could face multiple probates, each one according to the laws in that state.
It takes time, typically six months to a year in Nebraska, and even longer if there are disputes or other complications. During part of this time, assets may be frozen until accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval.
Your family has no privacy. Probate is a public process, so any “interested party” can see what you owned and who you owed. The process invites disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors.
Doesn’t joint ownership avoid probate?
Not really; it usually just postpones it. With most jointly owned assets, when one owner dies, full ownership does transfer to the surviving owner without probate. But if that owner dies without adding a new joint owner, or if both owners die at or near the same time, the asset must be probated before it can go to the heirs.
Watch out for other problems. When you add a co-owner, you lose control. Your asset may be subject to claims of creditors of your co-owner. There could also be gift or income tax problems, and since a will does not control most jointly owned assets, you could inadvertently disinherit family members. Finally, your heir loses the benefit of the step-up in basis that is accorded to gifts that take effect upon or after death.
With some assets, especially real estate, all owners must sign to sell or refinance. Adding a child as co-owner of your home makes them a necessary party to all important decisions involving your residence. Also, if a co-owner becomes incapacitated, you could find yourself with a new “co-owner,” the court, even if the ill owner is your spouse.
Why would a court get involved at incapacity?
If you can’t conduct business due to mental or physical incapacity, it may be necessary to have a court appointed conservator take over your affairs. Once the court gets involved, it usually stays involved until you recover or die. This public process can be expensive, embarrassing, time consuming and difficult to end if you recover. And it does not replace probate at death. In effect, your family could have to go through the court system twice!
Does a durable power of attorney prevent this?
In some circumstances, a durable power of attorney may be sufficient to allow a spouse or other trusted family member to handle your affairs if you are unable due to incapacity. A power of attorney may be open-ended and does not contain the same limitations and safeguards as a living trust. However, durable powers of attorney can be useful to supplement the management of your assets provided by a living trust, as by enabling the person you appoint to deal with government agencies.
What is a living trust?
A living trust is a legal document that, just like a will, contains your instructions for what you want to happen to your assets when you die. But, unlike a will, a living trust avoids probate at death, can control all of your assets, and avoids the need for a court appointed conservator if you should become disabled.
How does a living trust avoid probate and prevent court control of assets at incapacity?
When you set up a living trust, you transfer assets from your name to your trust, which you control such as Bob and Sue Smith, husband and wife” to “Bob and Sue Smith, trustees under trust dated 01/01/2010.”
Do I lose control of assets in my trust?
Absolutely not. You keep full control. As trustee of your trust, you can do anything you could do before–buy and sell assets, change or even cancel your trust (that’s why it’s called a revocable living trust). You even file the same tax return. Nothing changes but the names on the titles.
Is it hard to transfer assets to my trust?
No, and your attorney and other advisors can help. You need to change titles on real estate (in- and out-of-state) and other titled assets (stocks, CDs, bank accounts, other investments, insurance, etc.). Most living trusts also include jewelry, clothes, art, furniture, and other assets that do not have titles. Also, you should consider changing beneficiary designations on assets like annuities and insurance to your trust. IRAs and 401(k) plans can be exceptions.
Doesn’t this take a lot of time?
It will take some time, but you can do it now, or you can pay the courts and attorneys to do it for you later. One of the benefits of a living trust is that all your assets are brought together under one plan. Don’t delay “funding” your trust. It can only protect assets that have been transferred into it.
Should I consider a corporate trustee?
You may decide to be the trustee of your trust. However, some people select a corporate trustee (bank or trust company) to act as trustee or co-trustee now, especially if they don’t have the time, ability or desire to manage their trusts or if one or both spouses are ill. Corporate trustees are experienced investment managers, they are objective and reliable, and their fees are usually reasonable in light of the services they perform.
If something happens to me, who has control?
If you and your spouse are co-trustees, either can act and have instant control if one becomes incapacitated or dies. If something happens to both of you, or if you are the only trustee, your handpicked successor trustee will step in. If a corporate trustee is already your trustee or co-trustee, they will continue to manage your trust for you.
What does a successor trustee do?
If you become incapacitated, your successor trustee looks after your care and manages your financial affairs for as long as needed, using your assets to pay your expenses. If you recover, you automatically resume control. When you die, your successor trustee pays your debts and distributes your assets according to the instructions in your trust. All this is done quickly and privately, according to your instructions.
Who can be successor trustees?
Successor trustees can be individuals (adult children, other relatives or trusted friends) and/or a corporate trustee. If you choose an individual, you should name more than one successor in your case your first choice is not available to act.
Does my trust end when I die?
Unlike a will, a trust doesn’t have to die with you. Assets stay in your trust, managed by the person or corporate trustee you have chosen until your beneficiaries (including minor children) reach the age(s) when you want them to inherit, or your trust may continue to provide for a loved one with special needs.
How can a living trust save on estate taxes?
If you die in 2014 and the net value of your estate is more than $5,250,000 including life insurance, federal estate taxes must be paid. If married, your living trust can include a provision that will let you and your spouse leave up to $10.5 million estate tax-free.
Doesn’t a trust in a will do the same thing?
Not quite. A will can contain wording to create a testamentary trust to save estate taxes, care for minors, and the like. However, because it’s part of your will, this trust cannot go into effect until after you die and the will is probated. So it does not avoid probate and provides no protection at incapacity.
Is a living trust expensive?
Not when compared to the costs of court processes at incapacity and death. How much you pay will depend on how complicated your plan is. Be sure to get an estimate.
How long does it take to get a living trust?
It should only take a few weeks to prepare the legal documents after you make the basic decisions.
Should I have an attorney do my trust?
Absolutely. There are many pitfalls in trust planning, and “one size” definitely does not fit all. An attorney with considerable experience in living trusts can provide valuable guidance and peace of mind that your trust is thoughtfully and properly prepared.
If I have a living trust, do I still need a will?
Yes, you need a “pour-over” will that acts as a safety net if you forget to transfer an asset to your trust. When you die, the will “catches” the forgotten asset and sends it into your trust. The asset may have to go through probate first, but it can then be distributed as part of your living trust plan.
Is a “living will” the same as a living trust?
No. A living trust is for financial affairs. A living will is for medical affairs–it provides your instructions about life support in terminal situations.
Are living trusts new?
Hardly. They’ve been used successfully for hundreds of years. Early trusts were used in 16th century England to control vast feudal estates under a law called the Statute of Uses passed in 1535 by the Parliament of King Henry VIII.