Living Trust: What Is It, and Do I Need One?
You may view a "trust" as something that only applies to rich people — not us "average folks." Maybe not! Read on.
What is a trust?
A trust is simply a legal mechanism (a binding document) that allows an individual to hold legal title to (or own) property for and of another. The holder is called the trustee, and the person who benefits from this arrangement is the beneficiary.
A "living trust" (also known as an "inter vivos," a "revocable," or a "grantor" trust) allows a person to maintain control over all of his or her property that is held in the trust while they are alive and then pass it to beneficiaries at death. This property can be assets such as person's home, bank accounts, and investments. Generally, most people appoint themselves as the trustee in charge of managing their trust's assets. As a result, even though their assets have been put into the trusts, they are allowed to remain in control. A successor trustee, which can be either a person or an institution, can manage a trust's assets if a person is not able to do so for his or herself.
Why use a trust?
Most people that use a living trust do so to avoid probate. Probate is the court process in which an estate of a deceased individual is distributed to the people or organizations in his or her will or by the laws of that state if there is no will. This is done after all of the estate's debts are paid and all other matters are finalized (e.g., real estate sales and bank accounts liquidated). Probate has been known to take several months to close, and it must occur before the beneficiaries or those who are named in a will are legally allowed to receive what is intended to be theirs. During this time, a percentage of the estate is reduced by the costs of attorney fees, court costs, and other bills. All of this is avoided with a trust, as assets can slide directly to the beneficiaries upon death. In other words, this property owned by the living trust can be managed by the trustee and distributed according to the individual's directions without the supervision or involvement of a judge.
There are some drawbacks to using a living trust. They can take more time to set up than a simple will (and a person should have a will, regardless of whether they create a trust). In addition, there is ongoing maintenance, and it is more of a hassle to make changes to a trust than a will. The ongoing maintenance involves transferring title to all assets to the trust that are intended to be held in that trust. This means including currently-owned assets in the creator's name and any assets that he or she obtains in the future. If an asset is not specifically designated to the trust for ownership, it most likely would be subject to probate. One other thing to remember is that the cost of an attorney can be several hundred dollars an hour.
Do I need one?
The favorite answer of most attorneys to any legal question such as this is, "It depends." A living trust certainly isn't "needed" or required by anyone. The question more accurately is, "Does a living trust make sense in my situation, and can I benefit from constructing one?"
To determine whether it makes sense for you, first answer the following questions:
- What is your age?
- How much wealth do you have?
- Are you married?
- Do you have children?
- Are there other factors that make a living trust potentially beneficial in your situation?
Age. As a general rule, a living trust is not very helpful for healthy individuals who are less than 60 years of age, married, with school-age children, and have no significant assets. Such people should, however, have a will (along with a healthcare directive and a limited power of attorney for incapacity). This document will work to transfer property according to your wishes in the event of a sudden death. Another point is the fact that estate tax law changes and new manners of avoiding probate have become regular occurrences in the post-baby-boomer generations.
Wealth. Once a person's age is considered, we must next look at wealth. The wealthier a person is, the more useful a living trust and other types of estate planning can be to avoid probate and to maintain the property for beneficiaries and inheritors. What is "wealthy?" The definition of a wealthy individual for this discussion is one who has roughly over $1 million in property and investments. The types of assets you have can be a factor in this decision as well. For example, $4 million in the bank may be easier to move through probate than your dry cleaning business would be. No one is expecting the cash, but the dry cleaners have day-to-day activities that the trustee would have to monitor and report to the probate judge during the months leading up to when the estate is probated. In this instance, a living trust makes some sense.
Marital status and children. An individual who is married and plans to leave most of the property to his or her spouse has little concern for making plans to avoid probate. The majority of couples own assets together; in such cases, probate would not be needed to dispose of those assets. Several states are community property states, which also allow the surviving spouse to maintain property or asset ownership. Other states allow the surviving spouse to take advantage of special probate procedures that are more expeditious and economical than a standard probate proceeding. Therefore, younger married couples who: (i) do not have much in the way of assets, (ii) do not have children, and (iii) who will leave their assets to each other when the first one of them dies, are not in need of a living trust. It would be of no benefit to them.
Other factors. If an individual has property in two or more states, a living trust might make sense. In this way, he or she could avoid probate in one or both states. Factors like unconventional state probate laws and other ownership situations can also create unique issues.
These are the basic scenarios and reasons for creating a living trust. Of course, everyone's situation is different. You should seek more information from an attorney or estate planning specialist.