Many myths surround these popular estate planning tools.
Living trusts are created with a clearly defined objective: to avoid probate. Misconceptions about living trusts have spread to the point where people think they can accomplish much more than they really do. Here is a realistic assessment of living trusts.
If you fear probate, consider a living trust. If you worry about your will being contested or your heirs fighting over your assets, a revocable living trust may be your best option.
You fund a revocable living trust with all, or largely all, of your assets during your lifetime. The trust owns the assets, yet you can still use these assets while you live. Once you die, the revocable living trust becomes irrevocable or no longer can be modified and the trust assets are distributed according to your wishes by your appointed trustees without having to probate them.
In addition to giving you more control and privacy, a living trust may save your heirs time and money. On average it takes roughly 18 months to distribute the typical estate because of probate. Settlement costs from probate can eat up as much as 5% of an estate.
Living trusts do not reduce taxes. Assets within a living trust are fully taxable at the federal and (generally) state level. Unless someone has drafted the trust to include tax-saving provisions, it will offer no particular estate or income tax advantages to the grantor or the beneficiaries.
Living trusts can require a lot of paperwork. As the trust has to become the legal owner of your assets to be effective, the title needs to be changed on those assets. That means filling out multiple forms and revising others incurring additional expenses along the way.
Living trusts do not relieve trustees of their duties. When a grantor of a living trust passes away, the language in the trust document will not magically “do all the work” for the successor trustee. While a successor trustee will usually not have to deal with probate, other responsibilities remain. Titles will need to be changed and appraisals may be necessary.
A living trust is not a will. You still need a will when you have a living trust. In fact, you are probably going to need a “pour-over” will down the road, assuming you will keep accumulating assets after the trust is drawn up. A pour-over will place these stray assets into the trust.
Additionally, you need a will if you want to make charitable bequests or gifts to friends or relatives upon your passing. A living trust cannot carry out these gifts on your behalf, nor can it name a guardian for any minor children.
A living trust is not a living will, either. A living trust does not function as a health care directive or a power of attorney. These are separate estate planning documents. While some families ask attorneys to create them concurrently with a living trust, a living trust won’t stand in for them.
While living trusts are highly touted and can be highly useful, that does not mean every family should get one.
You may not need a living trust to begin with. If your financial life has been largely free of “creditors and predators” and your estate isn’t complex, a thoughtfully drafted, well-executed will could prove sufficient when the time comes. For some middle-class families, a living trust can be like a fifth wheel on a car, seeming to provide stability, but actually unnecessary.
After all, not all assets are subject to probate when someone passes away: IRA, Keogh and pension plan savings, life insurance death benefits, checking and savings accounts that have POD beneficiaries, Treasury bonds, and property owned jointly with the right of survivorship pass directly to the new owner.
As a reminder, this article is intended as an overview of living trusts, and not any kind of legal advice. If you are considering a living trust or another kind of estate planning vehicle, the best “first step” is to talk to an attorney before you proceed further.
Kurt Schlesinger is a representative with The Investment Center 57 Millstream Ct Pawling NY and may be reached at 845-855-5008 or firstname.lastname@example.org
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