Living Trust—at some point someone or some article may have suggested that you consider a Living Trust as part of your Estate Plan. But what does the term “Living Trust” mean? Just because someone recommended a Living Trust, doesn’t mean that you should blindly accept the advice when you don’t understand what it means. So what is a Living Trust? Who should have a Living Trust? Well, you have probably heard about Estate Planning, which involves creating a medical, financial and legacy plan for your incapacity and death.

What Is a Living Trust

A Living Trust refers to a written legal document that acts as a preferred substitute for a Will. A Will is a mere set of instructions for a Probate Court Judge, which has no legal significance during your life. On the contrary, a Living Trust is effective immediately after it is signed. Additionally, a Living Trust is an entity that can own property, with specific rules that you create. Since it can own property, after creating a Living Trust you would transfer your assets into the Living Trust, such as your home, cars, stocks, bank accounts, etc. These assets would be controlled by you during your lifetime; then controlled by someone else you designate during your incapacity (i.e., a

Successor Trustee); and then distributed to your beneficiaries benefit after your death.
Aside from having a good plan in place for your incapacity, putting assets into the Living Trust will save your heirs from the horrors of Probate in the future. Briefly, Probate is a court process which is required if you pass away with or without a Will, or if you have a trust but fail to transfer your assets into the trust.

As mentioned, the term Revocable Living Trust is synonymous with a Living Trust, and although the word “revocable” is sometimes left out, it’s important to understand that the trust is indeed a “revocable trust,” which means that it can be revoked or amended at any time by the person or persons who created the trust (“Grantors”).

Prior to discussing who should have a Living Trust or at what age to do a Living Trust, let’s consider how a Living Trust affects the person who makes it.

How Does a Living Trust Work?

In most cases, the person(s) who create a Living Trust appoint themselves as the manager of the trust. This position is known as the Initial Trustee, and the Trustee’s responsibility is to manage the trust’s assets. By so doing, even though your assets have been moved into the trust, you still retain control of your property throughout your life. The flexibility and one of the major benefits of a Living Trust is that you can name a Successor Trustee, who can be a person that will manage the Trust assets if you are unable to do so, for example in the case of your incapacity.

The question then of “What Is a Living Trust”, can be summarized as follows:

  • The Living Trust takes ownership of your assets and divides the management and benefits of those assets among two different people: the Trustee and the Beneficiary. Of course, you can have more than one Trustee or Beneficiary – and, just as important, you can have several “levels” of these people, in case they themselves are unable to manage the accept the benefits of the assets.
  • The Living Trust will allow you to avoid Probate.
  • Since you will name Successor Trustees, the Living Trust will provide you with the best form of incapacity protection and planning.

 

When Is the Right Time to Do a Living Trust?

If you’ve been thinking about meeting with an Estate Planning lawyer to set up a Living Trust, you might be wondering when is the right time to set up a Living Trust? The simple answer is that you should think about a Living Trust Estate Plan, as life events occur. More specifically, we suggest that:

  • When you have kids we strongly suggest that you consider a Living Trust. In our experience, most people only think about a Living Trust as a way to avoid Probate, so they believe that a Living Trust is for older, wealthy people. While it is true that younger parents may not be as concerned about Probate, a Living Trust will offer the most flexibility for parents to retain control of any assets (even life insurance benefits), in case minor kids are left without their parents. The Living Trust will also offer better incapacity planning for young parents, in case of a medical emergency.
  • When you purchase real estate we strongly suggest that you consider a Living Trust. Whenever you purchase a personal or investment property, you must consider creating a Living Trust. This is specifically so that you can transfer ownership of the property from you to your trust, which will avoid Probate. With real estate, there is no way to simply assign beneficiaries, as you can with certain retirement, financial and insurance accounts. Some people will suggest that you can own real estate as joint tenants with right of survivorship, in which case the surviving joint tenant will own the property following the death of the other joint tenant. However, this is a foolish attempt at Estate Planning, as it fails to account for a very beneficial tax code provision related to a basis step up. You can read more about that here.
  • When you are Single you should very seriously consider a Living Trust Estate Plan. If you are not married or do not have a Registered Domestic Partner, there is no default and simple answer as to who should make decisions for you. In the case of financial decisions, if you are incapacitated, it is always the best and easiest approach for a Successor Trustee to step in for a single person to make decisions. And although it is not related to the Living Trust, an Advanced Health Care Directive (also known as a Medical Directive) will allow you, if you are Single, to designate a person to make medical decisions for you. This Advanced Health Care Directive is mentioned here because it is one of the documents that would be prepared as part of your Complete Estate Plan.
  • When you are concerned about incapacity (due to your age or health, for example) you should consider a Living Trust Estate Plan. You will recall that a Living Trust will allow a Successor Trustee to step into your shoes, should you ever become incapacitated. Some people have suggested that you can just use an agent (by nominating one with a Power of Attorney), however, based on our experience, an agency relationship is much less effective, as compared to a Trustee.
  • When you have Estate Tax concerns you should consider a Living Trust. It is true that, based on today’s federal estate tax exemption, most people will not be concerned about estate taxes. However, if you’re estate is fairly large, a Living Trust can absolutely help you to set up a clear distribution plan for your heirs.
  • When you are concerned about distributing money to your kids you should consider a Living Trust. The thought of distributing any assets to minor kids is a cause for concern. If you can remember being 18, you’ll understand that any financial distribution to a minor (or even adult) child, can mean that your hard-earned money will be quickly spent and wasted. The Living Trust has tremendous flexibility with regard to how assets get distributed to your beneficiaries, including minor or adult kids. While most people are ok to distribute assets outright (i.e., without any restrictions), if you have minor or adult kids, you should consider staged distribution or a lifetime trust for the child. You can read more about that here.

When Is the Right Time to Do a Living Trust?

If you’ve been thinking about meeting with an Estate Planning lawyer to set up a Living Trust, you might be wondering when is the right time to set up a Living Trust? The simple answer is that you should think about a Living Trust Estate Plan, as life events occur. More specifically, we suggest that:

  • When you have kids we strongly suggest that you consider a Living Trust. In our experience, most people only think about a Living Trust as a way to avoid Probate, so they believe that a Living Trust is for older, wealthy people. While it is true that younger parents may not be as concerned about Probate, a Living Trust will offer the most flexibility for parents to retain control of any assets (even life insurance benefits), in case minor kids are left without their parents. The Living Trust will also offer better incapacity planning for young parents, in case of a medical emergency.
  • When you purchase real estate we strongly suggest that you consider a Living Trust. Whenever you purchase a personal or investment property, you must consider creating a Living Trust. This is specifically so that you can transfer ownership of the property from you to your trust, which will avoid Probate. With real estate, there is no way to simply assign beneficiaries, as you can with certain retirement, financial and insurance accounts. Some people will suggest that you can own real estate as joint tenants with right of survivorship, in which case the surviving joint tenant will own the property following the death of the other joint tenant. However, this is a foolish attempt at Estate Planning, as it fails to account for a very beneficial tax code provision related to a basis step up. You can read more about that here.
  • When you are Single you should very seriously consider a Living Trust Estate Plan. If you are not married or do not have a Registered Domestic Partner, there is no default and simple answer as to who should make decisions for you. In the case of financial decisions, if you are incapacitated, it is always the best and easiest approach for a Successor Trustee to step in for a single person to make decisions. And although it is not related to the Living Trust, an Advanced Health Care Directive (also known as a Medical Directive) will allow you, if you are Single, to designate a person to make medical decisions for you. This Advanced Health Care Directive is mentioned here because it is one of the documents that would be prepared as part of your Complete Estate Plan.
  • When you are concerned about incapacity (due to your age or health, for example) you should consider a Living Trust Estate Plan. You will recall that a Living Trust will allow a Successor Trustee to step into your shoes, should you ever become incapacitated. Some people have suggested that you can just use an agent (by nominating one with a Power of Attorney), however, based on our experience, an agency relationship is much less effective, as compared to a Trustee.
  • When you have Estate Tax concerns you should consider a Living Trust. It is true that, based on today’s federal estate tax exemption, most people will not be concerned about estate taxes. However, if you’re estate is fairly large, a Living Trust can absolutely help you to set up a clear distribution plan for your heirs.
  • When you are concerned about distributing money to your kids you should consider a Living Trust. The thought of distributing any assets to minor kids is a cause for concern. If you can remember being 18, you’ll understand that any financial distribution to a minor (or even adult) child, can mean that your hard-earned money will be quickly spent and wasted. The Living Trust has tremendous flexibility with regard to how assets get distributed to your beneficiaries, including minor or adult kids. While most people are ok to distribute assets outright (i.e., without any restrictions), if you have minor or adult kids, you should consider staged distribution or a lifetime trust for the child. You can read more about that here.

Pros and Cons of a Living Trust

Once you have determined who should have a Living Trust, the next thing is to know the pros and cons of a Living Trust. That is, what are the advantages and disadvantages of a Living Trust?

If you have been researching the topic, you will most often read that the major advantage of a Living Trust is that it enables you to avoid Probate. Remember that Probate is the court process involved in the administration and distribution of your assets under the laws of your state after you are dead. The Probate process is lengthy, public, very expensive and cannot be controlled. All of these Probate concerns can be avoided if you have a properly funded Living Trust.

The other major benefit of a Living Trust is the ability to plan for incapacity. Although Estate Planning is mostly associated with what happens after you die, it is now a fact that most people will become incapacitated before they die. It is thus vital that everyone plan for the inevitable, which is that you will come to a point where you need to benefit from the assets you have, but that you can no longer manage those assets. In these situations, a Living Trust is the best solution, because the Trustee and Beneficiary can be different people.
There are fortunately very few disadvantages to preparing and having a Living Trust. Some people have suggested that the high cost of a Living Trust is a major disadvantage. However, if you spend the time to research, there are law firms with significant experience in Estate Planning, but who provide very affordable rates and payment plans. The other main concern about creating a Living Trust is that it will fail if it is not funded. This means that you can spend the money to create a Living Trust Estate Plan, but for a Living Trust to work properly, your assets have to be transferred into the trust arrangement. Some people see this task as too difficult to accomplish. In fact, this funding process is not at all difficult. It can just be time-consuming. For example, for existing real estate, trust transfer deeds need to be prepared to transfer title from you to the Living Trust. While this sounds complicated, the law firm should include this as part of your Estate Planning services. As for other assets, such as investments accounts, you will need to‘re-title’ the accounts— but this only requires a simple beneficiary change form. In sum, the disadvantages of a Living Trust are less of a disadvantage and more of an excuse to procrastinate.

Summary

If you have questions about “Who Needs a Living Trust”, or if you have specific questions about your situation, we welcome and encourage you to speak with our firm, Vaksman Khalfin, PC. We have several highly skilled Estate Planning attorneys.

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"You will not be disappointed" John M.R. - Harrison, NY
"You will not be disappointed"
John M.R. - Harrison, NY