Although it’s not at the top of most things that people think what (or even want to think about), the time eventually comes when most folks start to think about their property, and how it will be passed on to their family, friends or charities. But there is one common problem: most folks don’t know what to do, or how to start the process. Worst yet, some people believe that their situation is so simple that default state laws will be good enough.
You may have already heard of a: «revocable living trust» (also known as an «inter vivos trust») or even an«irrevocable trust». But, what do they mean, and is there any difference between them? And the most important question: should you use at least one of them as part of your Estate Planning?
Our goal is to provide you with all the necessary information and answer your questions clearly and precisely.
What exactly is a Living Trust?
First of all, what is a revocable living trust? It is a legal document which you create during your life. There are three (3) main people (or persons) involved in a living trust: Grantor(s) (i.e., the creator(s)); Trustee(s) (i.e., the manager(s)); and Beneficiaries (i.e., the benefactors).
Thus, after you (the Grantor) create and properly “fund” a living trust, the assets within it are invested, spent and/or used by the trustee for the benefit of the Beneficiary.
How does a Revocable Living Trust differ from a Will?
It can seem that some people use these terms interchangeably and, indeed, both are legal instruments used for the disposition of ownership of assets upon your passing. However, that’s where the similarities end.
Some benefits of the Living Trust include:
- There is no probate. A Will is merely a set of instructions for a Probate Court judge and, as such, a Will has no legal effect until it goes through Probate, which it must necessarily do in order to effectuate the Will-makers wishes. Rather, a Living Trust is a document that is effective immediately upon execution and does not get filed anywhere. Thus, a Living Trust beneficiary will have no need to go through a complicated, costly and lengthy court process.
- A Trust is more private than a Will. Do you want your personal information publicly known to everyone, forever? If not, choose a Living Trust.
- Even if your property is spread across different states, it’s not a problem. A properly prepared Living Trust helps to manage all of the assets through one vehicle.
- Lower costs. There is no need to pay extra money for the court processes and so on.
- Incapacity planning. When you are no longer able to properly manage your assets, a Successor Trustee can easily step into your role. During this time (of your incapacity), the Successor Trustee serves to benefit you (since you were the Initial Trustee + Beneficiary). As soon as you’re able to resume your duties, you can regain control, just as easily as you relinquished control (i.e., through a simple Trustee designation).
Trusts can generally be divided into two categories:
- Irrevocable Trusts. Just as the name implies, if a trust is irrevocable, its terms cannot be changed. There are some workarounds for the seemingly rigid structure, however, these trusts do involve you giving up control of the assets since you give up any incidence of ownership to the assets. You can set up an irrevocable trust during your life, or after you pass away. Although you may wonder why anyone would ever want to give up ownership of their assets, the answer is mainly two-fold: 1) the assets are no longer part of your estate (for tax purposes) and 2) the assets become asset protected against any creditors and predators of the irrevocable trust beneficiary. These trusts are more complicated to setup and administer, and should primarily be used as an advanced Estate Planning strategy. They are essentially a separate entity, each having their own Tax Identification Number.
- Revocable Trusts. These types of trusts are by far the most common. As explained above, they are primarily used for Probate Avoidance and Incapacity Planning. You have complete control over your assets, and you can revoke or amend the trust terms as often as you’d like. In fact, other than the ownership title of the assets, nothing much changes – you even still file taxes just as you always have – using your name and personal social security number.
Advantages of a Living Trust:
- Avoid delays and hassles. A Living Trust enables you to avoid Probate and, as such, bypass court which will save a lot of time, money and stress. As a result, more of your assets will pass to your beneficiary in a shorter period of time. If you’re just using a Will, expect your heirs to pay a percentage of your total assets (excluding any mortgages!) and wait as long as 2 years to liquidate your estate.
- Privacy. Bypassing Probate means that everything remains private, and nothing is lodged with the court. Even celebrities are not immune (Jacqueline Kennedy Onassis, Prince, and David Bowie are just a handful of famous folks whose Wills were made public.)
- Lower fees. By transferring assets through a Living Trust (during a Trust Administration), your heirs will pay a small fraction of the fees they would have had to pay in Probate Court.
- Incapacity planning. Most people become incapacitated before they pass away, and there is no better way to plan for your incapacity than through a Living Trust by naming Successor Trustees.
Disadvantages of a Living Trust:
- Complexity. A Living Trust is not entirely simple, and even lawyers can get confused by them. Take the time to learn and, despite their complexity, you’ll understand why they are the preferred method for transferring assets to your loved ones.
- Initial Cost and Firm choice. Do your research and choose a reasonably priced law firm with at least 5-10 years of experience, which has prepared at least 1000 Estate Plans. While it is important to use a law firm (and not just a legal services provider), some law firm charge as much as $6,000 to prepare a complete Estate Plan, while others such as ours are much more competitively priced due to use of technology and streamlined processes.
- Maintenance. Don’t forget about keeping up with changes. A Revocable Living Trust has flexibility specifically because it is meant to be updated from time-to-time. Make sure to work with a law firm that offers a Living Trust Maintenance Plan so that any changes are quick, easy and reasonably priced.
If you have $5 or $50M dollars, a revocable living trust is generally the right choice for your Estate Planning. Of course, there are other ways to transfer your assets, such as doing nothing and using state default rules, or by creating a Will. However, by not using a Living Trust as the cornerstone of your Estate Plan, you may be asking to pay more, wait more and have no guarantees as to our wishes. If you are still not sure which is best for you, or if you just have some lingering questions, you can call a Revocable Trust attorney for a free consultation.