What is a Living Trust, and Should I Have One?
Having a Living Trust can save the cost and delay of probate proceedings at your death. But, the biggest reason for having a Living Trust is the peace of mind about how much easier it makes things for your loved ones while they are adjusting their lives after your disability or death. Let’s explore what a Living Trust is, what happens if you don’t have one, and what things a Trust can mean to you and your loved ones.
First, What is a Living Trust?
A Living Trust is a method of transferring and holding legal title to your property in the name of a Trustee, with instructions to the Trustee as to how to manage or dispose of the property, including later at your death for the benefit of the beneficiaries. It’s called a “Living” Trust because you create it and use it now while you are still living. If it is a “Revocable” Living Trust, then you can revoke it or amend it at any time while you are alive and have legal capacity to amend it.
The key parties to a Trust are:
- The “Grantor”: the person (normally you or you and your spouse) who creates the Trust and transfers property into it).
- The “Trustee”: the person you designate as the fiduciary to hold the legal title to the Trust property and manage the property according to the instructions in the Trust document. (It can be you, or you and your spouse as co-Trustees, or some other person, and then any other person(s) you name to later serve as “successor” Trustee if the current Trustee dies, becomes incapacitated, or is otherwise unavailable or unwilling to serve.)
- The “Beneficiaries”: the persons named or described as categories of persons who will have certain rights under the Trust (either now or in the future), or the eventual outright ownership of Trust property when the Trust terminates at some point after your death. (Normally you or you and your spouse are beneficiaries during your lives, then after your death(s) other persons, such as your children, grandchildren, other relatives, friends, or charities, are named to be given income or ownership of the Trust property under conditions or at times you instruct.) The list and conditions for different Beneficiaries can be as simple or as complex as you can imagine (within certain limits of property law and tax law).
What Would My Loved Ones Go Through if I Die Without a Living Trust?
A Trust creates great advantages, both for you now and for the loved ones you leave behind. But to understand the value of those benefits, let’s first look at what happens if you don’t have a Trust.
What Happens if I don’t have either a Will or a Trust? Without a Will or Trust, you have no control over what happens to the property you individually own when you die. To transfer title of your property to anyone after your death, a probate estate case must be opened in your local Probate Court. The Court must appoint a personal representative, and your heirs and creditors notified. Any claims against the estate must be litigated, and any allowed claims paid with Court permission. After that, the Court must then decide what happens to your remaining property, how it gets divided, to whom, and in what amounts. The Court supervises the entire process, including everything the personal representative does, the payment of claims, and distribution of all property. The probate process is costly (legal fees and other costs of probate can easily reach $7,000 – $10,000). And, the process can be lengthy (in some cases a year to 1½ years). Until the probate process is completed, no one except the estate (and the personal representative supervised by the Court) has any title or right to do anything with your property.
The worst part is that, because you have left no Will to inform the Court what your wishes are, the Court is required to follow the state “intestacy law” to decide who gets your property, and in what amounts or proportions. In most states, if you leave both a spouse and children, the intestacy laws require that a significant portion of your estate (50% for example) must be distributed to your children. This leaves your spouse without a portion of your estate to survive on. And, the portion distributed to the children (if they are minors) must be placed into a Conservatorship, with a Court-appointed Conservator to manage the funds under Court supervision until each child becomes an adult. The funds must be invested for the children (not your spouse), and cannot be spent for any purpose other than for the benefit of the children. The Conservator must get Court permission to do anything with the children’s inheritance, and typically the Conservator is required to file an annual accounting with the Court to document, and obtain approval for, handling of the estate property.
Obviously, this can leave your loved ones with additional financial and property management burdens, all at a time they are mourning your loss.
But I do have a Will; isn’t that enough without having a Trust? This depends on your particular circumstances, but in most cases, probably not. Here’s why.
I’ve heard many people say that, because they have a Will, they don’t have to go through probate. That’s not true. A Will must be probated to be effective. Your Will only informs a Probate Court your desire as to how the Court should divide your property. But, your Will does nothing to distribute that property until or unless it is admitted to probate and carried out by the Court. So, an estate must be opened, your Will admitted to probate, and an executor appointed. Legal notices must be given to the beneficiaries named in the Will, all other heirs (even heirs you have chosen to disinherit), and all your creditors. Any challenges to the Will have to be litigated. Then all the other probate procedures must be followed for claims of creditors, payment of claims, and then distribution of property in accordance with the Will, all supervised by the Court. So, having a Will is important, to allow the Court to distribute your estate to the persons whom you designate. However, it does not, by itself, transfer legal title in your property to your loved ones or other beneficiaries you name in your Will. Only a Court can do that, requiring the cost and time delay of opening a probate estate, and going through the probate process.
What Does a Living Trust Do for Me and my Loved Ones?
If you have a Trust (and if you have transferred into that Trust all your property that is subject to probate), no probate estate is required to transfer title to that Trust property at your death. This is because even though you have died, you as an individual were not the owner of the property. There is still a living Trustee who is the “owner” of the property, on behalf of the Trust. Even if you were the Trustee, your death triggers the automatic appointment of a successor Trustee you have designated to take over that role. Because the legal title to the property is held by someone still alive, that living person can carry out the provisions of the Trust document without any Court order. No probate case or probate Court is needed to transfer title.
So, a properly done living Trust:
- Avoids the cost of legal fees and other costs of probate. The Trust document already tells the owner of the legal title (the Trustee) whom to transfer property to after your death. The Trustee does not need the permission of any Court to follow those instructions to distribute the property.
- Avoids the delay that it would otherwise take for a Court to probate the estate and transfer the property. The transfer of property is accomplished as soon as the Trustee carries out the Trust instructions.
- Avoids the public scrutiny about what property you own, what it is worth, and to whom it gets assigned. (Probate court proceedings and documents are public records that anyone can view. Trust documents are private documents that normally only the Grantor, Trustee, and Beneficiaries (and of course the family’s legal and tax professionals) ever see.
- Permits great flexibility. You can give instructions as to whom, if, when, and under what conditions, your property is given to others; how long the Trust will stay in place; and for whose benefit. You can give the Trustee wide discretion, or make the instructions very specific.
- Avoids Conservatorships. You can instruct your Trustee to manage funds for benefit of minors without needing a Conservatorship.
- Permits the seamless handling of your property upon disability. Your successor Trustee continues managing your property if you become incapacitated or just want help managing your estate.
- Can be an important part of elder law planning (whether for you, your spouse, or an older parent), or even special needs planning (including for a child): mapping out what happens to property, how and by whom it will be managed, and for whose benefit.
- Can minimize potential business succession problems. We will explore that in another article.
As always, every person and family has unique circumstances, goals, and needs. No one method of estate planning is a “cookie cutter” solution. Consult your own trusted legal professional, and your CPA to discuss strategies that are right for you.