Living Trusts
A living trust is a helpful tool for managing the way your assets will be distributed after your death. It is called a living trust because it takes effect while you are still alive, as opposed to a will, which takes effect when you die. The most popular choice is a “revocable living trust”—one that you can revoke or change whenever you want.
Some people confuse living trusts with living wills. But the latter, an entirely different sort of document, states your wishes about being kept alive if you're terminally ill or seriously injured.
Saves Probate Costs
A key advantage of a living trust is that the property you leave doesn't have to go through probate court before it reaches the people you choose to inherit it. Probate is the legal process that involves taking an inventory of your property, paying your debts, and distributing your property to your beneficiaries. When you die, a living trust can save your heirs time and probate costs. After all your property has been transferred to the beneficiaries, the living trust ceases to exist.
A living trust also protects your privacy because, unlike a will, it does not become a matter of public record when you die.
How Living Trusts Work
When you create a living trust, you transfer your assets and ownership of your property into the trust. This may include stock in a privately-owned business, publicly-traded securities, a home, real estate, bank accounts, certificates of deposit, stocks, bonds, and life insurance. Merely setting up a trust agreement does not place any property into the trust —a separate transaction is needed for each asset. Making an effective living trust requires paperwork that may be tedious, but it’s essential. For example, if you want to leave your house through the trust, you must sign a new deed showing that you now own the house as trustee of your living trust.
You appoint a trustee to manage your trust, just as an executor would manage your will. You can be the trustee of your own living trust, which means that while you are alive you keep full control over all property held in the trust. You can identify one or more successor trustees to take your place at any time, such as when you die or if you become incapacitated. Because “incapacity” can be a gray area, the trust document should spell out how it will be determined.
Misconceptions About Living Trusts
Even if you have a living trust, you need a will as a back-up device for handling assets you haven’t put into the trust. If, for example, you acquire property shortly before your death, you may not think to transfer its ownership to your trust. In the absence of a will, any property not transferred by your living trust or other probate-avoidance device (such as joint tenancy) will go to your closest relatives according to state law, so it may not be distributed the way you wanted. A will is also important if you have minor children because it lets you nominate their guardian.
Although living trusts cut probate costs, they do not save on income taxes, nor do they necessarily reduce estate taxes. Some companies falsely attribute tax benefits to living trusts and claim they automatically protect your assets from creditors or nursing home costs, which isn’t true. And a living trust can be challenged after your death just as a will can, contrary to what some people think.
Seek Reputable Help
Although living trusts are a good estate planning choice for many people, watch out for high-pressure sales pitches surfacing across the country. Some unscrupulous salespeople have charged consumers—especially the elderly—thousands of dollars for what amounts to a bunch of preprinted legal forms that do not meet their personal needs. Even worse, because these consumers think they have taken the proper steps, they may die without realizing that they did not set up a useful estate plan. When you’re planning your estate, it’s best to work with a professional you know and trust or someone whose references you have carefully checked. A good estate attorney can structure living trusts for complex family situations such as remarried spouses with children from an earlier marriage. Be sure to ask how a living trust may affect your eligibility for Medicaid nursing home benefits later on.
Living trusts are not for everyone. It costs more to establish a trust than to create a will, so your estate should be large enough to justify those fees. In fact, the biggest consideration in deciding whether to create a living trust is wealth. Put simply, the more money you have, the more you can save your heirs by avoiding probate when you die. Healthy people under age 55 with a moderate income may not benefit much from a living trust. But if you own a small business or other assets you don't want tied up during probate, a living trust can make sense even for a young person.
A Good Valuation Is Essential
If you own a business, all your financial strategies, including estate planning, depend on knowing what your company is worth. Owners often think they know, but in reality they may be shockingly misinformed. For example, SPARDATA, a leading national business appraisal firm, surveyed 2,000 business owners in 2001 and found that most misjudged the value of their businesses by 50% or more—sometimes by millions of dollars. So be sure your business is properly appraised before implementing any financial plan.
