A Living Trust can save your family a great deal of time and money. The big advantage is that property left through a trust avoids probate.
Avoiding Probate
Unless you create a Living Trust or use some other probate-avoidance method, your property will probably have to go through probate before the beneficiaries receive it. Generally, property left through a Will must go through probate.
In the probate process, the Will (if there is one) is proved valid in court, and debts are paid. Then, the remaining property is distributed to the beneficiaries named in the Will, or, if there isn’t a Will, the closest relatives. The cost of probate varies widely from state to state but, in the most expensive states, attorney, court, and other fees can eat up about 5% of your estate, leaving that much less to go to the people you want to get it. If the estate is complicated, the fees can be even larger.
Consider, at 5%, a $500,000.00 estate would pay $25,000, just for basic probate court costs.
At least as bad as the expense of probate is the delay it causes. In many states, probate can take a year or two, during which time the beneficiaries generally get nothing unless the judge allows the immediate family a small “family allowance.”
If you own real estate in more than one state, it’s usually necessary to have a whole separate probate proceeding in each state. That means the surviving relatives must probably find and hire a lawyer in each state and pay for multiple probate proceedings.
From the family’s point of view, probate’s headaches are rarely justified. If the estate contains common kinds of property — a house, stocks, bank accounts, a small business, cars — and no relatives are fighting about it, the property merely needs to be handed over to the new owners. In the vast majority of cases, the probate process entails nothing more than tedious paperwork, and the attorney is nothing more than a very highly paid clerk.
Avoiding the Need for a Conservatorship or Guardianship
A Living Trust can be useful if you become incapable, because of physical or mental illness, of taking care of your financial affairs. That’s because the person you named to serve as trustee at your death, can take over management of the trust assets. The person who takes over has the authority to manage all property in the trust and to use it for your benefit.
EXAMPLE: Mrs. Carson creates a Living Trust, appointing herself as trustee. The trust states that if she someday can no longer manage her own affairs, her daughter:
Kayla will replace her as Trustee.
If there is no Living Trust and you haven’t made other arrangements for someone to take over your finances if you become incapacitated, a court must appoint someone. Typically, the spouse or adult child of the person seeks this authority and is called a conservator or guardian.
Keeping Your Estate Plan Confidential.
When your Will is filed with the probate court after you die, it becomes a matter of public record. A Living Trust, on the other hand, is a private document in most states. Because the Living Trust document is never filed with a court or other government entity, what you leave to whom remains private. (There is one exception: Records of real estate transfers are always public.)
Some states require that you register your living trust with the local court. But there are no legal consequences or penalties if you don’t.
The only way the terms of a Living Trust might become public is in the highly unusual circumstance where someone files a lawsuit to challenge the Trust or collect a court judgment you owe.
HOW IT WORKS
A Revocable Living Trust does essentially what a will does: leaves your property to the people you want to inherit it. But because a Trustee owns your property, your assets don’t have to go through probate at your death.
While Alive, You Retain Control
When you create a Revocable Living Trust, you appoint yourself the Trustee, with full power to manage the trust property. Then you transfer ownership of some or all of your property to yourself as Trustee. You keep absolute control over the property held in Trust. You can:
• sell, mortgage or give away property held in trust
• put ownership of trust property back in your own name
• add property to the trust
• change the beneficiaries
• name a different successor trustee, or
• revoke the trust completely.
EXAMPLE: Steven Banks creates a Revocable Living Trust and names himself as trustee. He then transfers his valuable property — a house, bank accounts, and stocks — to himself as Trustee. As Trustee, he can sell, mortgage, or give away the Trust property, or take it out of the Trust and put it back into her name.
After You Die, The Trustee Takes Over
After you die, the person you named in your Trust document to be the Successor Trustee takes over. This person transfers the trust property to the relatives, friends, or charities you named as the trust beneficiaries. No probate is necessary for property that was held in trust. In most cases, the whole thing can be handled within a few weeks. When all the property has been transferred to the beneficiaries, the Living Trust ceases to exist.
If any of your beneficiaries inherit trust property while still young, the Successor Trustee has more responsibilities. The Successor Trustee will follow the instructions you left in the trust document, and either:
• transfer the property inherited by the child to the “custodian” you chose, to manage the property until the child reaches an age specified by your state’s law (21 in most states, but up to 25 in a few states), or
• keep the property in a “child’s sub-trust,” using it for the child’s benefit, until the child reaches an age you designate.
EXAMPLE: Mrs. Brown sets up a Revocable Living Trust to avoid probate. In the trust document, she makes herself the trustee and appoints her son David Brown as successor trustee, to take over as Trustee after her death. She transfers her valuable property — her house, savings accounts, and stocks — to the Living Trust.
The trust document states that Mrs. Brown’s grandson, Phillip, is to receive the stocks when she dies. She provides that if Phillip is not yet 27 when she dies, the stocks will stay in a “child’s sub-trust,” managed by the successor trustee David Brown. Everything else goes to her son David Brown.
When Mrs. Brown dies, David Brown becomes Trustee. He follows the terms of the trust document and, in his capacity as Trustee, distributes all the trust property — except the stocks — to himself, without probate.
David Brown also manages the stocks inherited by Phillip, who is 14 at Mrs. Brown’s death, until his 25th birthday. When all the property in the sub-trust is given to Phillip or spent on his behalf, the sub-trust ends.