“Avoid costly probate! Save taxes! Protect your family!”
At least every three or four months, I either receive a mailing or see an advertisement inviting me to a seminar on the benefits of creating a living trust. Headlines scream out the benefits, creating the impression that only a fool would not attend the seminar and learn how to use this amazing tool.
What is a Living Trust?
To answer that, you first have to understand what a trust is. A trust is a legal entity that separates legal ownership of property (in the name of a trustee) from the right to the benefits of the property (beneficiaries).
In most cases, the advertisements refer to a revocable living trust. It is called that because the creator of the trust can end the trust at any time (revoke the trust). A living trust is created and used during a person’s life, as opposed to a trust created at death by a will.
Why create a Living Trust? What are the benefits?
Like any estate planning tool, the appropriateness of a living trust depends on your goals and your circumstances. Here are some potential benefits:
Management of your assets. As we age, we confront both mental and physical challenges that can impact our ability to manage our affairs. By placing your assets – your home, your non- retirement financial investments, and other assets – in a trust and naming a co-trustee or successor trustee, you can reduce the chances of a costly court-supervised guardianship being needed should you be unable to handle your financial affairs. For married couples, if one spouse always handles the financial affairs because the other spouse has little interest or financial acumen, an outside trustee can prevent that management burden being placed on that spouse if the other becomes impaired.
Real property in another state. Ownership of real estate is controlled by the laws of the state in which the real estate is located. This can cause added expense at your death if you own real property, say a vacation home in another state. Under normal circumstances, you have to go to probate court in the state you live and probate court in the state the vacation home is located. By placing the vacation home in a living trust and naming who should own the home at death, your estate can avoid the cost of the legal proceeding in the other state.
Avoid probate – maybe. If all your assets are either in your living trust or in non-testamentary assets with proper beneficiary designations (e.g., your retirement account or life insurance), you can avoid probate court. The problem is that that you have to be diligent in placing every appropriate asset in your trust. Placing a significant asset in your name my mistake or signing a financial account that provides for payment to your estate at death, may force your family to go to probate court anyway.
Keep your estate private – at least part of it. Your will has to be filed with the probate court and becomes a public record, thus allowing anyone to know the amount of any specific gifts given in your will as well who you named as beneficiaries. A living will keeps that information private. Due to legislation in 2013, however, information about the value and nature of your assets is not always required to be made public by filing with the probate court.
Why create a Living Trust? What are not benefits?
Does not avoid costly probate. Probating an estate is not costly in Texas as a general rule. Furthermore, when you compare the cost and time of creating the trust and transferring property in to it, as well as steps the trustee must take after death with the administration of an estate without a trust, the cost and time are about the same. The only difference is timing. As one commentator has said, a living trust allows you to accelerate probate, not avoid it.
Does not avoid taxes. A revocable living trust will not save you income taxes or estate taxes. Trust income while you are alive is reported on your tax return as if a trust did not exist and any strategy that may reduce estate taxes can just as easily be implemented with a properly written will.
Does not avoid the need for a will. You will still need a will, called a pour-over will, to go with a living trust to transfer into the trust any remaining assets at death.
A revocable living trust is just one more tool that is available in crafting an appropriate estate plan. It is definitely not a one size fits all solution for everyone.